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Russia: Central bank raises key interest rate surprisingly

In the fight against rising inflation, the Russian central bank has surprisingly raised its key interest rate. In doing so, it followed the example of other central banks in leading emerging markets.

The interest rate will be raised from the record low of 4.25 to 4.5 percent. “The rapid recovery in demand and increased inflationary pressure require a return to a neutral monetary policy,” the central bank justified its move. At the same time, it expressly reserved the right to raise interest rates further in the coming months.

In February the rate of inflation rose to 5.7 percent, after having been 5.2 percent at the beginning of the year. The central bank is aiming for a value of around four percent. According to our own forecasts, it will only reach this level again in the first half of 2022. It is true that cheap money can stimulate consumption and investment. The rising demand also threatens inflation.

On the foreign exchange market, the Russian ruble reacted with gains against the euro and the US dollar. Higher interest rates make the currency more attractive to investors. A stronger ruble can at the same time make imports cheaper and thus help to reduce inflation.

Other emerging countries are also raising key interest rates

It is the first increase since 2018 after the key interest rate had been cut sharply over the past two years. The central bank has now also made it clear that a further increase could follow.

In the past few days, the central banks of the emerging countries Brazil and Turkey had already raised their key interest rates: the Turkish by 2.0 percentage points to 19.0 percent and the Brazilian from 2.0 to 2.75 percent.

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