FX.co ★ Russia Central Bank Signals July Rate Hike

The Russian central bank opted to maintain its key interest rate for the fourth consecutive policy meeting, citing ongoing inflationary pressures and robust domestic demand. However, it indicated that a rate hike could be on the horizon for the next meeting.

Led by Governor Elvira Nabiullina, the Bank of Russia's board of directors kept the key rate steady at 16.00 percent. The next policy review is scheduled for July 26.

The board underscored the necessity of maintaining stringent monetary conditions to return inflation to its target level by 2025, aiming to stabilize it around 4 percent.

Liam Peach, an economist at Capital Economics, commented, "The June inflation figures will likely be key in determining whether there is a rate hike in July. With strong price pressures expected to continue for a while, we believe a 100 basis point hike to 17.00 percent is highly probable."

Recent official statistics showed that Russia's consumer price inflation increased to 8.1 percent in May, up from 7.8 percent in April.

The central bank noted that inflation had plateaued, staying close to the levels observed in the first quarter of the year. In April, seasonally adjusted annual price growth was 5.8 percent on an annualized basis, a slight increase from the 5.7 percent average in the first quarter. Core inflation, which excludes volatile items, also rose to 8.3 percent.

The bank's statement highlighted that domestic demand growth continues to outpace the supply capacity of goods and services.

In the first quarter, the Russian economy exhibited strong growth, driven by increased household incomes, positive consumer sentiment, and substantial business investment.

Nevertheless, this rapid economic expansion has diverged from a balanced growth trajectory, exacerbating issues such as labor shortages and historically low unemployment rates, according to the bank.

The Bank of Russia also addressed forthcoming tax policy changes, noting that higher budget expenditures in the upcoming years will be financed by increased consolidated budget revenues. This aligns with the fiscal policy normalization planned for 2025 and is expected to have a neutral impact on inflation.