The Bank of Russia raised interest rates by 200 basis points to 15 percent last week, exceeding the 100-basis-point increase expected by analysts.
It was the fourth consecutive rate hike by the bank, which it implemented in response to the weakening rouble, high inflation and rising government spending.
The central bank has raised interest rates by 7.5 percentage points (750 basis points) since July, including an unscheduled emergency hike in August when the rouble weakened to above 100 per U.S. dollar.
Governor Elvira Nabiullina warned that the rate could be held or raised further this year, sharing the possibility of a 100- or 150-basis-point hike. The next rate meeting is scheduled for December 15.
"At recent meetings, we raised the key rate by tangible steps and will be ready to do this again if we do not see signs of a sustainable slowdown in inflation and a cooling of inflation expectations," Nabiullina said.
Russia has been easing the emergency interest rate hike to 20 percent made in February 2022, following its military involvement in Ukraine and subsequent Western sanctions.
It has kept a hawkish stance, committing to prolonged tight monetary conditions, but removed guidance that it would study the need for additional hikes. This leaves analysts uncertain about the future.
"We have not reached the limit on the rate," said Dmitry Polevoy, head of investment at Locko-Invest.
Inflationary pressures in Russia
Russia has been increasing government spending, especially on the defense sector, to fund its "special military operation" in Ukraine. The defense budget has surged from 2.7 percent of GDP in 2021 to 3.9 percent this year. It is projected to increase by over 70 percent in 2024, reaching approximately six percent of GDP, based on Reuters' analysis of official plans.
This has contributed to high inflation — which hit six percent in September — and a decline in private consumer spending, about 10 percent below levels seen before the invasion for the past 18 months.
In turn, Russia raised its inflation forecast for 2023 to 7.0 to 7.5 percent from its previous forecast of 6.0 to 7.0 percent. Annual inflation was running at 6.38 percent as of October 16.
Russia conceded that it might not be able to bring inflation back to its four percent target in 2024, forecasting year-end inflation at 4-4.5 percent.
High demand that outpaced supply and high lending growth, coupled with supply chain disruptions from the COVID-19 pandemic and the Russian invasion of Ukraine, have driven up prices.
The bank attributed the rise in inflation to 6.6 percent in October from six percent in the previous month to the war-torn economy's limited ability to meet increased consumer demand.
Russian businesses also faced significant underlying inflationary pressures in Q3, with seasonally adjusted price growth averaging 12.1 percent in annualized terms. This figure went up from 5.1 percent in Q2.
"Today's decision ... will have a moderately positive impact on the rouble in the coming days," said Mikhail Vasilyev, chief analyst at Sovcombank.
On Friday, the rouble strengthened against the dollar by 0.4 percent at 93.57. Earlier in the trading session, the currency reached 92.5100, its strongest point since September 12. However, as of writing, it has fallen to 91.9480.
Brent crude oil, a worldwide benchmark for Russia's primary export, rose 0.8 percent to $88.61 per barrel. Russian stock indexes, however, were lower, with the dollar-denominated RTS index (.IRTS) down 0.1 percent to 1,083.6 points and the rouble-based MOEX Russian index (.IMOEX) down 0.1 percent to 3,219.4 points.