RUSSIA’S central bank surprised markets yesterday by hiking its overnight deposit rate by a quarter of a percentage point, to 3.5 per cent.
Its other rates were held steady, as expected, the key refinancing rate sticking to 8.25 per cent and the repo rate at 5.5 per cent.
“The decision was made taking into account still-high inflation expectations and risks to steady economic growth,” the central bank said in a statement.
“The achieved level of interest rates is seen by the central bank as securing an acceptable balance between risks that inflationary pressure will persist and that economic growth will slow in the coming months,” the central bank stressed.
Annual inflation in Russia, recorded at 9.7 per cent in May, is a major issue ahead of parliamentary elections in December of this year and a presidential election in March next year.
Since the start of the year, consumer prices have already risen 4.6 per cent, challenging the central bank’s full-year target of six to seven per cent and the government’s inflation ceiling of 7.5 per cent.
The central bank said, however, that monetary drivers of inflation were becoming less of a concern. It said that a slowdown in money supply growth in May would contribute to a decrease in inflation over time.
Analysts had widely expected the central bank to keep all interest rates unchanged due to the slowing pace of recovery.
“Low deposit rates facilitate capital outflows, which policy makers are not happy about,” said Aurelija Augulyte, an analyst at Nordea Bank.
Augulyte and other analysts said that the deposit rate hike signaled the central bank’s intent to make interest rates a more effective policy tool by narrowing the gap between its deposit rates and lending rates.
Despite being surprised at yesterday’s hike, analysts expect interest rates to rise later this year.
Russia 8.25% refinancing rate