Russia raises key interest rate to 5.5% as it struggles to control inflation

Russia’s central bank has raised its key interest rate by 50 basis points as Moscow struggles to tame inflation, which is running at its highest level for almost five years.

The second consecutive 50bp increase took Russia’s reference rate to 5.5 per cent, and the central bank said it would probably raise rates again in future as “the balance of risks has significantly shifted towards pro-inflationary ones”.

“Increased inflationary pressure in the context of the completing economic recovery can lead to a more substantial and prolonged deviation of inflation upward from the target,” it said in a statement. “This creates the necessity of further increases in the key rate at upcoming meetings.”

Annual consumer inflation rose to 6 per cent last month, driven by the relaxation of Covid-19 restrictions which is helping the economy recover from the impact of the pandemic, and a sharp rise in global food and commodity prices. That is the highest level since October 2016, and well above the central bank’s target of 4 per cent.

Rising prices, particularly of food, are a political problem for the Kremlin in a country where 20m people — or one in seven — live below the poverty line, and memories of rationing and hyperinflation are less than a generation old.

Moscow, which has imposed some price caps on key household products, is considering new export quotas or additional duties on food products if global prices continue to rise, the country’s economy minister told the Financial Times last week.

President Vladimir Putin said last week that inflation was one of Russia’s “two most urgent problems”, alongside a rise in unemployment since the coronavirus pandemic began.

“Key rate decisions will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets,” the central bank said on Friday.

“Given the monetary policy stance, annual inflation will return to the Bank of Russia’s target in the second half of 2022 and will remain close to 4 per cent further on,” it added.

Russia’s tightening cycle began in March, and in April central bank governor Elvira Nabiullina said a “serious, significant increase” in the key rate could be warranted to tame inflation, which is the bank’s primary focus.

The rouble was trading marginally higher on Friday, with one dollar buying Rbs71.58 shortly after the central bank’s announcement. Russia’s currency has risen 8 per cent since mid-April on rate rise expectations and stronger oil prices, and is at an 11-month high against the dollar.

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