Bank of Russia Holds Key Rate at 21%, Defying Analysts' Hike Expectations

Moscow, 20 December 2024. The Board of Directors of the Bank of Russia decided at its Friday meeting to keep the key rate at 21% per annum. The decision came as a surprise to the market: most analysts had expected an immediate 200-basis-point hike to 23% per annum, while some experts did not rule out a tougher step of up to 25% against the backdrop of rising pro-inflationary risks and a weakening ruble. Individual analysts allowed for a rise to 22%, whereas the option of holding the rate at 21% appeared in forecasts extremely rarely and was considered unlikely.

The regulator's statement points to a more substantial tightening of monetary conditions than the October decision on the key rate had implied. Autonomous factors, independent of monetary policy, contributed to this. In the Bank of Russia's assessment, the significant rise in interest rates for end borrowers and the cooling of lending activity have already formed the necessary tightness of conditions.

The rate path: from 15% to 21% in a year

The current tightening cycle began at the end of 2023 and continued throughout 2024. The trajectory of the key rate over this period looks as follows:

• 25 December 2023 — a 100-basis-point hike, from 15% to 16% per annum;
• four consecutive meetings with the rate held at 16% per annum;
• 26 July 2024 — a hike to 18% per annum;
• September 2024 — a hike to 19% per annum;
• 25 October 2024 — an immediate 200-basis-point hike, to 21% per annum.

"In the Bank of Russia's assessment, taking into account the significant rise in interest rates for end borrowers and the cooling of lending activity, the achieved tightness of monetary conditions creates the necessary prerequisites for the resumption of the disinflation process and the return of inflation to target, despite the currently elevated price growth and high domestic demand," the regulator's statement said. At the same time, the Bank of Russia warned that it would assess the appropriateness of raising the key rate at the next meeting, taking into account the further dynamics of lending and inflation.

According to the Bank of Russia's forecast, taking into account the monetary policy being pursued, annual inflation will decline to 4.0% in 2026 and will remain at target thereafter. Thus, the regulator expects that the tightness of monetary conditions achieved in Russia will prove sufficient to bring inflation back to the target level without a further rate increase — at least until the next meeting.

Source: Interfax, 20 December 2024.