11 Jun 2021 15:20

CBR hikes key rate 50 bps to 5.50% per annum, as expected

MOSCOW. June 11 (Interfax) - The Board of Directors of the Central Bank of Russia (CBR) has decided to hike the key rate by 50 basis points (bps) - to 5.50% per annum, the regulator said in a statement.

This decision coincided with analysts' expectations. The expert consensus regarding the rate hike by 50 basis points at once was reached after the publication of Rosstat data on inflation in May (in annual terms it quickened from 5.5% to 6.0%). After this, a number of economists who were expecting a 25 bp rate hike changed their forecasts towards a larger step - 50 bps.

Both the Russian and global economies are recovering faster than expected, the regulator said. Inflation is developing above the Bank of Russia's forecast. The contribution of persistent factors to inflation is increasing due to faster growth of demand compared to output expansion capacity. Over a short-term horizon, this influence is strengthened by price growth in global commodity markets. "Taking into account high inflation expectations, the balance of risks has significantly shifted towards proinflationary ones," the CBR said.

Increased inflationary pressure in the context of the completing economic recovery can lead to a more substantial and prolonged deviation of inflation upward from the target, the regulator said. "This creates the necessity of further increases in the key rate at upcoming meetings," it said.

Given the monetary policy stance, annual inflation will return to the Bank of Russia's target in the second half of 2022 and will remain close to 4% further on.

Inflation trends largely reflect the fact that steady growth in domestic demand exceeds supply expansion capacity in a wide range of sectors. In this context, businesses find it easier to transfer higher costs to prices.

At the same time, due to heightened inflationary expectations and actual inflation, monetary policy conditions remain soft, the regulator said.

According to the Bank of Russia's estimates, consumer activity has generally reached its pre-pandemic levels. The Bank of Russia estimates that output has exceeded its pre-pandemic levels in most sectors of the economy. "In these conditions the Russian economy will recover to pre-crisis levels as soon as 2021 Q2," the CBR said.

This is the second consecutive 50 bps rate hike. Last time in April, the Central Bank raised the rate by 50 bps to 5.0%. The first step towards monetary policy normalization was made by the Central Bank in March, when it raised its key rate by 25 bps to 4.5% from its historic low of 4.25%. First Deputy Governor of the Bank of Russia Ksenia Yudaeva said last week that the June 11 CBR board meeting would consider the options of raising the rate by 25 or 50 bps, while the likelihood of holding the rate unchanged was less likely.

The next meeting of the CBR board which will consider changing the key rate is scheduled for July 23.