Prime Highlights: 

Central Bank of Russia Holds Key Rate at 21%: The Central Bank of Russia has decided to keep its key rate at 21%, contrary to expectations of increasing it by 200 basis points.  

Monetary Tightness Cited: The move was based on tighter monetary conditions, including lower credit activity and higher borrowing costs, which have already helped to dampen inflationary pressures. 

Inflation Update: The central bank is confident that it will pave the way for inflation to return to its 4% target by 2026, even though CPI inflation remained at a high of 8.9% in November.  

Key Background: 

The Central Bank of Russia on Friday announced that it was keeping its key interest rate at 21%, in a decision that took the financial markets by surprise. Economists had widely anticipated a 200-basis-point hike after a similar move in October aimed at fighting the rising inflation. However, the central bank said it had attributed its decision to the more stringent monetary conditions that had already taken effect. 

The bank said that the conditions, caused by tighter credit activity and higher borrowing costs, have cooled inflationary pressures enough. The consumer price index (CPI) remained high, 8.9% a year in November, but the central bank pointed out that these conditions should lay a foundation for a gradual return to its inflation target and it expects inflation to decline to 4% by 2026. 

It reminded that it would not decide on the interest rate hike at its meeting in February, even if inflationary pressures had continued, especially in household and business segments. Having come down from 8.5% in October, the November figure for inflation was still at 8.9%, although it was driven by the increased prices of food items where an important component was of milk and its products. 

During his annual Q&A session, President Vladimir Putin recognized inflation as a challenge but said that real wages had risen 9% year-on-year, so that was some resilience to the economy. The IMF said Russia’s economy is projected to grow by 3.6% in 2024 before it sharply slows to 1.3% in 2025, attributing that to slow down in the economic fallout of reduced consumer spending and investment. 

Despite these factors, the IMF indicated that the Russian economy was operating at the limits of its capacity. In combination with a restrictive monetary policy, this was expected to dampen demand and further reduce the GDP growth rate. This highlights the delicate balancing act faced by the Central Bank: fostering economic growth while managing inflation, all while navigating the pressures of Western sanctions and the ongoing war in Ukraine.