Russia holds interest rate at 21%, inflation fears persist

During the Friday meeting, the Russian central bank left the main interest rate at 21 per cent. This is the highest level in history, set during the October hike. The bank emphasizes that inflationary pressure remains high, and medium-term inflation risks are still on the rise.

The monetary authorities have significantly revised their inflation forecasts. The bank now expects inflation in 2025 to be between 7 and 8 per cent, which is a significant increase from previous estimates of 4.5-5 per cent. A return to the inflation target of 4 per cent is not expected until 2026.

Inflation in Russia has remained unstable since the start of the invasion of Ukraine in February 2022. Contributing factors include Western sanctions and remedial measures taken by the authorities to stabilize the economy. Additional inflationary pressure is generated by the increase in arms spending related to conducting military operations.

According to central bank data, the annual inflation rate as of February 10 was 10 per cent, after a slight decline between December and January. The bank notes that future decisions on interest rates will depend on the speed and sustainability of the inflation decline.

Sofia Donets, chief economist at T-Investments, points out that the bank's decision may signal greater tolerance for inflation above the 4 per cent target this year. However, she does not rule out the possibility of further interest rate hikes. In her opinion, the central bank does not want markets to become too optimistic about the prospects of long-term rate cuts.

In response to the interest rate decision, the Moscow stock index rose by 0.86 per cent. The ruble's exchange rate against the dollar was 91. The next meeting of the Russian central bank on interest rates is scheduled for March 21.