Russian Central Bank Holds Key Rate At 7.5%, Noting High Inflation Expectations

Russia's central bank held its key interest rate at 7.5% on Friday, ending a months-long rate-cutting cycle as it noted a pickup in inflation expectations and warned of long-term pro-inflationary effects from Russia's partial mobilisation.

In the immediate aftermath of Moscow sending its armed forces into Ukraine on Feb. 24, the central bank hiked its key rate to 20% from 9.5% in order to mitigate risks to financial stability.

Since then it has cut rates six times and omitted forward-looking guidance at its previous meeting in September about studying the need for future reductions. The rate hold was in line with a consensus forecast of analysts polled by Reuters earlier this week.

"Inflation expectations of households and businesses are high and have slightly grown relative to the summer months," the bank said in a statement.

"The Bank of Russia assesses that the partial mobilisation will serve as a deterrent to consumer demand and inflation over the horizon of coming months. However, its subsequent effects will be pro-inflationary as it adds to supply-side restrictions."

President Vladimir Putin ordered a "partial mobilisation" of hundreds of thousands of men last month for the military campaign in Ukraine.

Inflation, which the central bank targets at 4%, stood at 12.9% as of Oct. 24, according to the economy ministry. The central bank tweaked its year-end inflation forecast to 12-13% from 11-13%.

"According to the Bank of Russia's forecast, given the monetary policy stance, annual inflation will drop to 5.0-7.0% in 2023 to return to 4% in 2024."

Analysts at VTB My Investments said the regulator's signal remained neutral.

"We do not expect key rate changes in the coming months, but at the same time we see pro-inflationary factors dominating the horizon for a year," they said in a note.

The central bank is caught in a bind between high inflation, which dents living standards and has for years been one of Russians' main concerns, and an economy in need of stimulation in the form of cheaper credit to address the negative effects of sweeping Western sanctions imposed in response to Russia's intervention in Ukraine.

The central bank improved its GDP forecast for this year to a contraction of 3-3.5% from an expected 4-6% decline previously. In late April, it had expected GDP to shrink 8-10%.

The bank forecasts a further contraction in 2023 before GDP returns to growth in 2024-25.

Central Bank Governor Elvira Nabiullina will shed more light on the bank's forecasts and policy in a media briefing at 1200 GMT.

The next rate-setting meeting is scheduled for Dec. 16.