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Business & Finance

Russia, holding key rate at 4.25pc, takes more cuts off the table

  • Bank of Russia keeps key rate at 4.25%.
  • Decision in line with expectations.
  • Central bank closes door on more rate cuts.
  • Sees inflation peaking at 5.5% in coming weeks.
  • Analysts mixed on timing of possible rate hike.
Updated 12 Feb, 2021

MOSCOW: Russia's central bank held its key interest rate at a record low of 4.25% on Friday and said it will not cut rates further, planning instead to start gradually raising them at some point in the future when inflation stabilises near its target.

Russia slashed rates in 2020 to help its economy through the COVID-19 pandemic, related lockdowns and a drop in the price of oil, the country's main export.

But the rouble's depreciation in the past year fanned consumer inflation, the central bank's remit, limiting room for additional rate cuts as recommended recently by the International Monetary Fund.

Central Bank Governor Elvira Nabiullina, presenting the rate decision at an online media conference, said the bank's board did not consider cutting or raising rates at Friday's meeting.

"We think the potential for monetary easing has been exhausted... In 2021, the monetary policy will remain soft, supporting recovery in the Russian economy," Nabiullina said.

The central bank kept its 2021 economic growth forecast at 3-4% after the economy shrank 3.1% last year. That contraction, though smaller than the central bank had predicted, was the sharpest in 11 years.

Inflation will peak at around 5.5% this or next month and start slowing afterwards, ending the year at 3.7-4.2%, the central bank forecast.

"Disinflationary risks no longer prevail over the horizon of 2021," the bank said in a statement, adding that it will now "determine the timeline and pace of a return to neutral monetary policy."

WHAT'S NEXT?

The decision to keep the rate at a level unchanged since July 2020 was in line with a Reuters poll. The poll also forecast that the rate is unlikely to change this year.

With its hawkish tone, the central bank "closes the door on further easing", Capital Economics said, predicting the first rate rise in October 2022.

Citi said it expected one 25 basis point rate hike by end-2021 and a return to a neutral policy stance by the end of 2022.

"The less favourable inflation backdrop calls for a gradual return to the neutral policy range of 5.0-6.0% over the next two years," Citi said in a note.

Sova Capital said the first rate hike was possible in the first half of 2022.

The next rate-setting meeting is scheduled for March 19.

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