Bank of Russia Raises Key Rate by 200 Basis Points to 21%, Signals Possible Further Hike

The board of directors of the Bank of Russia decided on Friday, 25 October 2024, to raise the key rate by 200 basis points at once — to 21% per annum, Interfax reported. The move took borrowing costs in Russia to a fresh high in the current tightening cycle.

A sharper step than the market expected

According to Interfax, the 200-basis-point option did feature in analysts' forecasts, but most experts had pencilled in a more modest increase of 100 basis points, to 20%. The actual decision therefore proved more aggressive than the consensus expectation.

Why the regulator tightened

In its statement, the Bank of Russia set out the reasons behind the decision:

• Inflation is running substantially above the Bank of Russia's July forecast;
• Inflation expectations continue to increase;
• Growth in domestic demand significantly outpaces the capacity to expand the supply of goods and services;
• Additional budget spending and the associated widening of the 2024 federal budget deficit have pro-inflationary effects.

"Further tightening of monetary policy is required in order to ensure the return of inflation to the target and to reduce inflation expectations," the regulator said, adding that the Bank of Russia does not rule out raising the key rate again at its next meeting.

The inflation forecast

The central bank projects that annual inflation will decline to 4.5–5.0% in 2025 and to 4.0% in 2026, and "will remain at the target thereafter".

The 2024 rate path

The October decision capped a year of steadily tighter policy. The trajectory of the key rate, as laid out by Interfax:

1. 25 December 2023 — raised by 100 basis points, from 15% to 16% per annum;
2. Four consecutive meetings — held at 16%;
3. 26 July 2024 — raised to 18% per annum;
4. September 2024 — raised by 100 basis points, to 19%;
5. 25 October 2024 — raised by 200 basis points, to 21%.

The next key-rate meeting of the Bank of Russia board of directors is scheduled for 20 December.

Market reaction

In an update published at 13:44 Moscow time, Interfax noted that the Russian stock market turned lower on the central bank's decision to raise the key rate to 21%. The original report was filed from Moscow at 13:31 on 25 October 2024.