The Russian central bank surprises the markets by keeping the key interest rate at 21%

The Russian central bank unexpectedly left its key interest rate unchanged at 21% on Friday, citing improved monetary policy that has created the conditions for containing rapid inflation.

“Monetary conditions have tightened more significantly than foreseen in the key interest rate decision in October,” said the bank saidreferring to factors that are “independent” of its monetary policy.

“In view of the significant increase in interest rates for borrowers and the cooling of credit activity, the tightening of monetary conditions achieved creates the necessary conditions for resuming disinflation processes and returning inflation to the target level, despite the increased current price growth and high domestic demand.” it added.

Markets had widely expected the central bank to raise interest rates by another 200% on Friday, after making such a move in October amid ongoing efforts to curb inflation caused by the military costs of Moscow’s invasion of Ukraine and Exports were fueled by Western sanctions against their most important raw material.

The bank said on Friday it would consider the need for a rate hike at its upcoming meeting in February. It currently forecasts that annual inflation will fall to 4% in 2026 and will remain at this target in the future.

Russia’s consumer price index is currently more than double that rate – annual inflation reached 9.5% on December 16, the bank said on Friday, pointing to ongoing pressures, particularly in the household and corporate sectors. The consumer price index reached 8.9% on an annual basis in November, compared to 8.5% in October. The increase was largely due to rising food prices. As the cost of milk and dairy products skyrockets this year.

The retention of interest rates comes even after Russian President Vladimir Putin admitted that interest rates would remain unchanged during his annual question-and-answer session with Russian citizens on Thursday The country’s inflation was problematic and that there were signs the economy was overheating. Nevertheless, he emphasized that Russia could still achieve economic growth of 3.9 to 4 percent this year.

“Of course inflation is such an alarming signal. Just yesterday, when I was preparing for today’s event, I spoke to the head of the Central Bank, Elvira (Nabiullina), who told me that it was already at around 9.3%. But wages.” “We grew by 9% in real terms, I would like to emphasize that – in real terms minus inflation – and the population’s disposable income also increased,” he said, according to comments reported by Interfax and translated by Google.

The International Monetary Fund forecasts Russia will post growth of 3.6% this year before slowing to 1.3% in 2025.

The “sharp slowdown,” the IMF said, is due to “private consumption and investment slowing amid tighter labor markets and slower wage growth.”

“What we are seeing in the Russian economy right now is that it is battling capacity constraints,” said Alfred Kammer, director of the IMF’s European department, said as the fund released its latest economic outlook in October.

“So we have a positive output gap, or you could put it another way – the Russian economy is overheating. What we expect next year is simply the impact that if you exceed supply capacity you won’t be able to maintain it for very long. So we. “I see an impact there of moving towards more normal territory, and that is of course supported by tight monetary policy from the Russian central bank,” he said.

“Tight monetary policy to reduce inflation slows aggregate demand and will have this impact on GDP in 2025. That is why we are seeing the slowdown in 2025,” Kammer added.