The Bank of Russia has raised its key interest rate from 19% to 21%, which is an absolute historical record. The previous high, 20%, was reached in February 2022 when the mega-regulator was forced to take emergency measures after a meltdown of the ruble and the freezing of the Central Bank’s assets abroad.
According to a Central Bank press release, inflation is running considerably above the regulator’s own July forecast, while inflation expectations continue to increase.
Market experts generally concur with the regulator’s decision.
“As long as the Central Bank reacts to inflation by raising the rate, because inflation noticeably exceeds the target level, we don’t have to worry about fiscal dominance,” economist Sergei Khestanov, Associate Professor at RANEPA, says.
By raising the key rate to 21%, the Bank of Russia unambiguously signaled to businesses and individuals that they should hold back on consumption, especially on buying on credit, Artyom Deyev, Head of Analytics at AMarkets, explains.
Now is definitely not the time to buy property, cars, expensive smartphones or household appliances with loans, the expert emphasizes.
In fact, the Central Bank’s move to raise its key rate by 200 basis points was aimed at encouraging the opposite behavior – saving more and spending less. Higher loan costs should discourage borrowing, while interest rates of 20% and above should make savings accounts more attractive.
“Moreover, if people and businesses do not heed the signal and continue to spend, it is possible that the key rate will be hiked again before the end of the year – until everyone finally sees reason and the market enters a cooling phase,” Artyom Deyev says. “Apparently, loans at 20% and above are still not a sufficient obstacle for many people.”