Russian Central Bank’s key rate up to 7

Russia’s Central Bank on Friday raised its key rate to 7.5%, while preserving favourable refinancing for investment projects, small businesses and export loans. The decision followed in view of higher inflation risks. Annualized inflation rate in the middle of April ran at 7.2%, in contrast to 6.4% in the middle of March. As the Central Bank said, the real effective exchange rate of the rouble against foreign currencies was down by 8.5% in annual terms.

Apart from the rouble’s rate the unfavourable situation in the markets of some foods, higher demand for non-food goods and growing prices of services contributed to the inflation. The Central Bank says that the risk of exceeding the targeted yearend inflation rate of 5% has grown considerably, while the Ministry of Finance argues that the targeted inflation range of 4.5-5.5% remains an achievable goal.

At the beginning of March the unfavourable market situation following markets’ response to tensions in Ukraine forced the Central Bank to push up the key rate from 5.5% to 7% The CBR then said the measure was temporary and a result of higher volatility observed on the financial markets. CBR Governor Elvira Nabiullina at the beginning of April said that the higher level of the key rate would stay in effect till the board of directors’ meeting on June 16.

While raising the key rate the CBR has preserved the favourable level of refinancing for a number of borrowers, first and foremost banks prepared to take part in investment projects. Loans will be issued at a rate of 6.5% to banks with assets above 50 billion roubles. The top one hundred Russian banks meet this requirement. Favourable lending to small and medium business at an interest rate of four percent will stay in effect, too.

The chief economist at Russia’s Deutsche Bank, Yaroslav Lisovolik, believes that the decision to raise the key rate was a well-founded one.
“The CBR has decided to forestall events to employ monetary and credit policy instruments that influence inflation. It was a correct step. We shall hardly see a U-turn, but the higher key rate will help prevent the national currency from further devaluation,” he believes.