Sergey Drobyshevsky, Principal Researcher at the Gaidar Institute predicted in a comment to Frank Media that the Central Bank of Russia's key rate would increase from 14% to 14.25%. According to the economist, the regulator will take into account the continuing high inflation rate, but will try to prevent excessive cooling of economic activity.
The rise in consumer prices, which remains above 6% year-on-year, argues in favor of an interest rate hike. In addition, the impact of the utility tariffs indexation since October 1 on inflation turned out to be stronger than expected, which may increase the inflation expectations of households and businesses.
At the same time, as Sergey Drobyshevsky notes, any further tightening of monetary policy is constrained by the unstable performance of production and investment. A sharp increase in the cost of borrowing could create additional risks for economic growth.
“We believe the Central Bank of Russia will choose between keeping the key rate at 14% and raising it, with an increase to 14.25% appearing the most likely scenario. On one hand, inflation remains above the target -- the annual rate is still over 6% -- and the reaction of consumer prices to the hike in utility tariffs on October 1 proved stronger than anticipated. This could further worsen economic agents’ inflation expectations. On the other hand, any rate hike will likely be symbolic: the positive momentum in the real sector and investments remains highly unstable. The key rate affects not only the cost of credit, but also the expectations of businesses and the general public regarding future output and demand. Therefore, it is important for the regulator to curb inflation while acting cautiously, so as not to cool down the economy too much,” noted Sergey Drobyshevsky.