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Russian central bank likely to increase interest rates amid rising inflation

Devdiscourse News Desk
Updated: 30-11-2018 18:53 IST
Russian central bank likely to increase interest rates amid rising inflation

(Image Credit: Pixabay)

The Russian central bank will likely need to raise interest rates in the next few months to tame rising inflation, given its plan to resume regular purchases of foreign currency on the local market, a Reuters monthly poll showed on Friday.

Russia raised rates for the first time since 2014 in September in response to a falling rouble and threats of more U.S. sanctions. A planned tax increase and the resumption of daily FX buying for state reserves suggest lending rates will need to be higher to prevent a spike in inflation.

The central bank is expected to hold its key interest rate at 7.50 per cent at the board meeting on Dec. 14, the consensus forecast of 18 analysts and economists showed.

But seven of those polled predicted an increase to 7.75 this year compared with a previous poll in late October that showed the central bank was expected to keep the rate unchanged at 7.50 until the end of 2019.

Central Bank Governor Elvira Nabiullina may have changed market expectations by saying this week that the bank would consider either holding or raising rates at the next board meeting.

Nabiullina also said the central bank would resume buying foreign currency for the finance ministry, something is put on hold in August. These purchases limit the room for rouble gains, with a weaker currency usually steering inflation higher.

Inflation expectations among households, which rose in November, also point to a tighter monetary policy if the central bank wants to keep annual consumer inflation close to its 4.0 per cent target.

The central bank would need to keep the rate at 7.75 per cent level well into 2019 due to lingering risks of sanctions against Russia, analysts at Nordea Bank said.

The impact of the rouble's weakening and the planned increase in value-added tax to 20 per cent from 18 per cent next year have not yet had a visible impact on inflation, said Stanislav Murashov, an analyst at Raiffeisenbank.

The poll predicted that annual inflation this year would reach 3.8 per cent, slightly below the central bank's target.

Gross domestic product growth is now seen at 1.8 per cent in 2018, up from 1.7 per cent predicted in the previous poll.

The rouble's future direction remains vulnerable to central bank policy and geopolitical risks. In one year from now, the rouble is seen at 65.50 versus the dollar and at 78.00 against the euro, the November poll showed.

That compares to 65.00 and 77.07, respectively, predicted in the October poll.

On Friday afternoon, the rouble traded at 66.77 against the dollar and at 75.95 against the euro.

(With inputs from agencies.)

COUNTRY : Russian Federation