Russia's Key Rate Hits 21%: the Central Bank Enters the 'Roaring Twenties' and Signals More Tightening Ahead

On 25 October 2024 the Bank of Russia took a step that few expected in its exact size: the board raised the key rate by 200 basis points, from 19% to 21% per annum, boldly entering territory above 20% that had long been considered off-limits. Just as important as the decision itself was the signal that accompanied it — a hawkish message that tightening will, with a high degree of probability, continue at the December meeting as well. The combination of a hawkish decision and an equally hawkish signal is meant to demonstrate the regulator's determination to return inflation to target at least in the first half of 2026: for 2025 the central bank no longer counts on reaching the 4% goal. Among the pro-inflationary factors the Bank of Russia named several government decisions at once — unplanned growth in 2024 budget spending, indexation of the vehicle recycling fee, and higher housing and utility tariffs.

The episode is a defining moment for Russia's economy in 2024. After a year in which growth ran well above the balanced path, demand kept outpacing the economy's capacity to supply goods and services, and prices accelerated through the autumn, the central bank has effectively declared that the fight against inflation now takes precedence over everything else — including the comfort of borrowers, banks and the government itself.

A hike the market expected — but not this big

There was little doubt that the board would raise the rate again at the penultimate monetary policy meeting of the year. Most analysts expected a 1 percentage point increase, to 20%, accompanied by a firm signal about the future direction of policy. A few experts allowed for a 2 percentage point step, but they were in the numerical minority — and notably, several of them were analysts with a high hit rate on the regulator's decisions. The additional tightening in October was effectively predetermined both by the central bank's September signal — the board had explicitly said it 'admits the possibility of raising the key rate at the next meeting' — and by the incoming inflation data. Central bank governor Elvira Nabiullina said before the start of the pre-meeting silence period that the decision was not predetermined, but fresh statistics published on Wednesday added supporters to the hawkish scenario: weekly inflation had picked up the fastest pace since the start of October, at 0.2%.

The expectations data told the same story. Household inflation expectations in October jumped by a full 0.9 percentage points, to 13.4% from 12.5%, and the consensus built from the forecasts of professional analysts surveyed by the central bank also rose meaningfully — from 7.3% to 7.7% for 2024 and from 4.8% to 5.3% for 2025. In the end, the board delivered the larger of the two widely discussed options: a 200 basis point increase to 21%, a substantial upward revision of the inflation forecast for the current year, and an admission that the moment of reaching the target is moving further away. This was the third consecutive rate hike, following a 2 percentage point increase in July and a 1 percentage point increase in September.

The October meeting was an anchor meeting: alongside the press release, the Bank of Russia also published its medium-term macroeconomic forecast. Updating the inflation expectations was as inevitable as the rate hike itself, because the July scenario had obviously lost its relevance. As early as September, at a non-anchor meeting, the central bank had given no new numbers but had acknowledged that the 6.5-7% range would probably be exceeded. The latest data available to the board as of 21 October showed cumulative consumer price growth of 6.27% since the start of the year and annual inflation of 8.46%.

The doubling of the inflation forecast

The central bank's new forecast for 2024 is 8-8.5% — whereas as recently as mid-year it stood at 4.3-4.8%. The lower bound of the new range is exactly twice the central bank's 4% target, a fact that Nabiullina herself highlighted at the press conference. She also underlined the pro-inflationary effect of the unplanned increase in budget spending this year by 1.5 trillion roubles and of the substantial indexation of the vehicle recycling fee. The new forecast 'overshot' not only the analysts' consensus but also the estimate of the Ministry of Economic Development (7.3%), which, however, had last been updated almost two months earlier.

The forecast for the following year underwent a less dramatic but symbolically important change: the central bank replaced 4-4.5% with 4.5-5%, which means the economy will live through yet another year with inflation above target. This is also the reason for the only change in the structure of the central bank's signal, which in substance sounds the same as in September but, given the new inflation forecast, no longer contains any reference to the timing of reaching the target. 'Further tightening of monetary policy is required in order to ensure the return of inflation to the target and to reduce inflation expectations. The Bank of Russia admits the possibility of raising the key rate at the next meeting,' the regulator said.

The inflation story is not only a consequence of structural changes in the economy — such as the chronic deficit on the labour market — and of government decisions, Nabiullina stated. 'There was an inaccuracy in our communication at the beginning of this year. Our forecast assumed a rate cut following the slowdown of inflation, but many interpreted it as meaning that we would cut the rate in any case. And this motivated people and businesses not to reduce their demand for credit,' she said. The central bank will be able to move to rate cuts only when inflation begins to decline sustainably, 'and we see that it is declining in line with our forecast', she added. 'When this will happen, we cannot say now, but you can look at our forecast of the average rate next year (17-20%). This forecast means that some rate cut next year, with such a decline in inflation, is possible.'

First deputy governor Alexey Zabotkin, who oversees monetary policy, reinforced the message: 'Those who believe that inflation will not decline next year should not expect the key rate to decline. One cannot simultaneously expect that next year inflation will remain the same as this year, and that the key rate at the end of next year will be lower than now. Such a state of nature is impossible.' He added a further warning drawn from the lessons of the past: at the start of the year, when a decline in inflation was expected, many had assumed the rate would fall regardless of how prices actually behaved — and had priced that in. Now, he stressed, what matters is whether inflation is genuinely and sustainably falling; only then can a rate cut follow.

A hawkish forecast to match a hawkish policy

In its fight against inflation and high inflation expectations, the Bank of Russia deployed the full palette of tightness. Alongside the wide rate step and the firm signal, the regulator substantially raised its forecasts for the rate trajectory over the coming years. Having admitted the communication mistake of early this year, the central bank decided to show the market that high rates will persist for a long time yet. The forecast of the average key rate for 2024 was raised to 17.5% from 16.9-17.4%; for 2025, to 17-20% from 14-16%; for 2026, to 12-13% from 10-11%. From 28 October to the end of 2024 the average rate is projected in the range of 21.0-21.3%, which means another increase is possible at the last board meeting of the year in December. The average key rate for 2027 remains expected at 7.5-8.5% — the range the central bank regards as neutral.

Such a trajectory, apparently, is not expected to significantly affect economic growth. The Bank of Russia kept its forecast for Russian GDP growth at 3.5-4.0% in 2024, 0.5-1.5% in 2025, 1.0-2.0% in 2026 and 1.5-2.5% in 2027. In the regulator's view, the upward deviation of the Russian economy from the trajectory of balanced growth remains significant. The central bank also lowered its Brent crude price forecast for 2024 to $80 per barrel from the $85 projected in July; forecasts for the following years were left unchanged — $80 per barrel in 2025, $75 in 2026 and $70 in 2027.

Inside the overheated economy

The underlying data explain the regulator's resolve. In September, the seasonally adjusted current price growth accelerated to 9.8% in annualised terms, after 7.5% in August. The analogous measure of core inflation rose to 9.1%, after 7.7% in August. Inflationary pressure, including the persistent component, approached the highest values since the start of the year. Annual inflation, as estimated on 21 October, stood at 8.4%, and for the full year 2024 it is expected in the range of 8.0-8.5%.

Inflation expectations rose significantly. In October, the expectations of households and businesses reached their highest levels since the start of the year, largely reacting to the currently high inflation. Short-term inflation expectations of professional analysts and long-term expectations derived from financial market instruments also increased. High inflation expectations reinforce the inertia of persistent inflation — once people expect prices to rise, they bring purchases forward and demand higher pay, which in turn keeps prices climbing.

The economy itself continues to grow, but at a more moderate pace than in the first half of 2024. The slowdown is mainly linked to growing constraints on the supply side, including the shrinking availability of spare production capacity and labour resources. Domestic demand is supported by the growth of lending and of incomes of households and businesses, as well as by the increase in budget spending. The labour market remains tight: unemployment stays at historical lows, the shortage of workers is widening across a broad range of industries, and wage growth continues to outpace productivity growth.

Monetary conditions keep tightening. Since mid-September, money market and bond market rates, credit rates and deposit rates have all risen, and the yield curve of government bonds shifted upward across all maturities. However, the rise in inflation expectations restrains the tightening of monetary conditions in real terms. High market rates support the saving mood of households. The end of the blanket subsidised mortgage programme on 1 July, the rise in rates and the tightening of macroprudential policy have cooled retail lending. The growth rate of corporate lending, by contrast, remains high because of the significant contribution of operations that are less sensitive to market rates. As a result, total credit to the economy is still growing at a high pace. The central bank believes its decision will accelerate the formation of the monetary conditions needed to return lending to balanced growth.

The September statement, published after the board's 13 September meeting, had already sketched this picture. In August, seasonally adjusted price growth stood at 7.6% annualised, and core inflation at 7.7% — below the average levels of the second quarter of 2024 but above those of the first quarter. Annual inflation, as estimated on 9 September, was 9.0%, after 9.1% at the end of August. GDP data for the second quarter and operational indicators for July-August pointed to a somewhat slower expansion, linked not so much to cooling domestic demand as to growing supply constraints and weaker external demand. Consumer activity, despite some deceleration, remained high, supported above all by income growth. Significant investment demand was backed both by budget stimuli and by companies' own funds accumulated in recent years. Mortgage lending slowed after the end of the blanket subsidised programme and the rise in market rates; the deceleration in consumer credit reflected both the effects of monetary policy and earlier macroprudential measures.

Analysts: from 22% to 23%

The market reaction was swift and, for the most part, hawkish in its own right. From the regulator's perspective, it is now important to maintain tough rhetoric so that there is no premature easing of financial conditions, notes Mikhail Vasilyev, chief analyst at Sovcombank. This will help transmit today's rate hike to the economy more effectively and slow inflation. He believes the peak of annual inflation, at 9.1%, was passed in July; by the end of the year he expects inflation to slow to around 8%, and to 5.5% by the end of 2025. The risks, however, are skewed toward higher inflation. In Vasilyev's forecast, the Bank of Russia will raise the key rate by another 100 basis points on 20 December, to 22% — in his base scenario this becomes the peak of the current cycle, and by mid-next year the central bank will be able to start cutting, bringing the rate to 17% by the end of 2025. 'In a risk scenario, if inflation does not slow and reaches 8.5% or higher by year-end, we allow for a key rate increase on 20 December to 23%,' he writes.

For Dmitry Polevoy, investment director at Astra Asset Management, the current tightening looks excessive. 'The level of uncertainty regarding monetary policy remains high; the key role is still played by the quality of macro forecasts in the market and at the regulator. We consider the current tightening excessive, which raises risks for the economy and the banking sector in 2025-2026,' he writes.

Rosbank is not yet in a hurry to raise its forecast of the peak key rate above 21%, leaving further tightening only for risk scenarios. 'However, on the 2025 horizon we see limited potential for a rate cut, with the average value near the upper bound of the regulator's range (20%). We believe the end of this year and the first half of 2025 will pass in a mode of record-high rates, since in light of high inflation and inflation expectations the restoration of trust in the 4% target level will take a long time (primarily through cooling economic activity on the private demand side). Only toward the second half of 2025 do scenarios for a gradual reduction of interest rates come into view,' says Evgeny Koshelev, director of the market research and strategy office at Rosbank.

The central bank's tough rhetoric points to a probable rate increase in December of up to 23% per annum, believes Sergey Konygin, chief economist at investment bank Sinara. 'Since in the updated forecast the average rate is expected until the end of the year in the range of 21-21.3%, the Bank of Russia may raise it at the December meeting to 22-23%. In addition, the substantial upward revision of the key rate trajectory for 2025 calls into question the scenario of a significant rate cut next year,' he writes.

The central bank continued to surprise the market with tough actions, notes Natalia Orlova, chief economist at Alfa-Bank. The text of the release focuses on inflation risks and no longer mentions the disinflation scenario discussed in previous releases, she emphasises. A rate increase on 20 December looks very likely, with a base scenario of a hike to 22%.

Renaissance Capital economists Oleg Kuzmin and Andrey Melashchenko keep their forecast of a 1 percentage point increase — now to 22% in December. In their view, the regulator's proactive policy substantially reduces the probability of the rate remaining unchanged for a long time after it reaches its peak. 'The decision raises our confidence that we will not see a prolonged (more than six months) period of the rate remaining unchanged after the last increase. That would have been more likely if the rate had stayed at, say, 18%. Given the current proactive policy, after an increase in December we expect the start of the rate-cutting cycle at the end of April 2025. Taking into account the higher starting point, we raise our end-2025 rate target by 0.5 percentage points — to 15%,' the experts write. They note that the Bank of Russia 'easily overcame what had seemed an important value of the rate at 20%' — which, in their view, underscores that with the inevitable decline of trust in its 'compass' (the inflation forecast) and in its medium-term vision of the economy, rate decisions depend more than usual on the current dynamics of inflation.

Sofia Donets, chief economist at T-Investments, estimates that the central bank's 'uncompromising toughness' implies a further increase of the key rate to 22-23% by the end of the year. 'It is unlikely that inflation will have time to slow sufficiently before the next meeting (20 December) to prevent another key rate increase,' she believes. 'The negative surprise of October was not so much the increase straight to 21% as the preservation of the tough signal and the indication of a further rate increase in December. The regulator obviously wants to accelerate the slowdown of inflation and aims to achieve the fastest possible braking of lending volumes,' Donets noted.

In summary, the market forecasts after the October decision look like this:

• Sovcombank (Mikhail Vasilyev): +100 basis points in December, to 22% (the cycle peak); cuts from mid-2025, down to 17% by end-2025; a risk scenario allows for 23%.
• Astra Asset Management (Dmitry Polevoy): the tightening is excessive, raising risks for the economy and the banking sector in 2025-2026.
• Rosbank (Evgeny Koshelev): the peak stays at 21% in the base case; record-high rates until the first half of 2025, with cuts only from the second half.
• Sinara (Sergey Konygin): a December increase of up to 23%; a significant cut in 2025 is called into question.
• Alfa-Bank (Natalia Orlova): a hike to 22% on 20 December looks very likely.
• Renaissance Capital (Oleg Kuzmin, Andrey Melashchenko): to 22% in December; the cutting cycle starts at the end of April 2025; the end-2025 target is 15%.
• T-Investments (Sofia Donets): 22-23% by year-end; the negative surprise was the signal, not the level.

How a rate hike cools an economy

To understand why the central bank is willing to accept such a high cost of money, it helps to recall how the key rate works. It is the interest rate at which the central bank lends to and borrows from commercial banks; it anchors the entire structure of market rates — from overnight interbank loans to mortgages and corporate credit. When the key rate rises, borrowing becomes more expensive across the economy. Households postpone big purchases financed by credit; companies delay investment projects that only pay off at cheaper financing; deposit rates rise, making saving more attractive than spending. Demand cools, and with it the pressure on prices.

The transmission, however, is slow and uneven. Credit contracts reprice at different speeds, and parts of the economy — notably segments financed by budget money or by operations insensitive to market rates — feel the tightening much less. That is precisely the pattern the central bank describes: retail lending cooling while corporate lending stays strong, and total credit to the economy still growing at a high pace. It is also why the regulator pairs the rate with macroprudential measures — limits and add-ons that make risky lending more expensive for banks — and why it watches inflation expectations so closely: if people believe prices will keep rising, they borrow and spend now, neutralising part of the tightening.

There is a further complication specific to this cycle: the pro-inflationary role of fiscal policy. The central bank explicitly named the unplanned increase in 2024 budget spending by 1.5 trillion roubles, the indexation of the recycling fee and higher utility tariffs as factors pushing prices up. When the government injects additional money into the economy while the central bank tries to withdraw it, the two policies work against each other — and the regulator's only remaining lever is to keep rates higher for longer. The central bank's statement makes this tension explicit: it proceeds from the announced parameters of budget policy, and a change in those parameters may require an adjustment of monetary policy.

December and beyond

The immediate question now is the 20 December meeting, when the board will again consider the key rate level, with the press release due at 13:30 Moscow time. The central bank's own projection of the average rate at 21.0-21.3% from 28 October to year-end leaves room for another increase — and the overwhelming majority of analysts cited above expect exactly that, with 22% as the base case and 23% as the risk case. On 6 November the Bank of Russia will publish the summary of the key rate discussion and the commentary to the medium-term forecast, which may clarify how close the board came to an even larger step.

The deeper question is what the 'roaring twenties' — a rate above 20% per annum — will do to the economy over the coming year. The central bank's own forecast suggests growth will slow to 0.5-1.5% in 2025, with the average key rate at 17-20% and inflation gradually converging to 4.5-5%. Analysts broadly agree on the direction of travel while differing on the pace: some see cuts starting as early as the second half of 2025, others warn that a credit slowdown, once begun, can stretch for a year or more. What unites them is the view that the regulator has made its priorities clear — price stability first, whatever the cost to growth in the short run.

For households, the practical consequences are already visible: expensive credit, attractive deposits, a cooling mortgage market after the end of the blanket subsidised programme, and wages that, for now, keep growing faster than productivity. For businesses, the high cost of borrowing is squeezing investment plans and margins, especially in sectors that depend on market financing rather than budget support. And for the government, the tension between spending commitments and the central bank's tightening remains the central macroeconomic fault line of late 2024.

The October decision, in short, is more than a rate hike. It is a declaration that the fight against inflation has entered its most demanding phase — one in which the central bank is prepared to hold rates at levels unseen for years, to keep signalling toughness even after the peak, and to wait as long as necessary for inflation to bend. Whether that resolve will be rewarded by a durable return to the 4% target in the first half of 2026, or whether the economy will pay a heavier price in growth and credit, is the question that will define Russian macroeconomics through the winter and into next year.