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Russian Central Bank struggles to tackle inflation

For the first time this year, the Bank of Russia raised the key rate from 16% to 18%, after the past six months of speedy price hikes forced the mega-regulator to drop its plans to start softening the monetary and lending policy in the second half of the year.

Sergey Guneev / RIA Novosti

The Central Bank has reported that it is necessary to toughen the monetary policy to ensure that inflation goes down again.

Now, the Central Bank predicts the annual inflation at 6.5–7% by the end of the year compared to earlier predictions of 4.3–4.8%. After expecting that inflation would bounce back to its target rate by the end of 2024, the mega-regulator does not rule out that the target will not be achieved even by the end of the next year.

The Central Bank raising the key rate from 16% to 18% is an unprecedented decision that indicates serious issues in the Russian economy, according to AMarkets Analytics Director Artem Deev. The inflation in Russia is high and the Central Bank is taking resolute action to hold it back. A higher key rate should slow down consumer demand and, subsequently, inflation pressure. The expert stresses that this sharp raise signals that the Central Bank is ready to take unconventional measures to stabilize the economy.

“Higher rates make loans more expensive for businesses and the public, which may slow down investment activity and the economic growth. More expensive loans may lead to lower consumer demand, which may also slow down the economic growth,” Artem Deev concludes.

Founder of SharesPro investment company Denis Astafyev believes that the higher key rate will stimulate banks to attract funds for longer terms, of at least six months.

This raise may create problems for those who constantly refinances loans because interest rates grow. The higher rate will also deter inflation that is significantly above the forecast.

“The Central Bank is essentially reducing the turnover of funds, shifting to a savings model,” Denis Astafyev explains.

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