Russia raises key interest rate to 5.5% as it struggles to control inflation

Russia’s central bank raised its key interest rate by 50 basis points as Moscow struggles taming inflation, which has been operating at its highest level for nearly five years.

The second straight 50 basis point increase in Russia’s interest rate led to 5.5 per cent, and the central bank said it was likely to raise rates again in the future because “the balance of risk has shifted significantly towards pro-inflationary risks”.

“Increasing inflationary pressure in the context of a full economic recovery could lead to a significant and long-term deviation of inflation from the target,” it said in a statement. This warrants the need for further increases in the key interest rate in the upcoming meetings. “

Annual consumer inflation rose to 6 percent last month, driven by the easing of Covid-19 restrictions that are helping the economy recover from the impact of the pandemic, and sharp rise in world food and commodity prices. This is the highest level since October 2016, and well above the central bank’s 4 percent target.

Rising prices, especially food, is a political problem for the Kremlin in a country where 20 million people – or one in seven – live below the poverty line, and memories of rationing and hyperinflation are less than a generation old.

Moscow, which has imposed some price caps on key household products, is considering new export quotas or additional duties on food products if global prices continue to rise, according to the country’s economy minister. For the Financial Times last week.

President Vladimir Putin said last week that inflation was one of Russia’s “most pressing problems,” along with a high unemployment rate since the coronavirus pandemic began.

“Key interest rate decisions will take into account actual and projected inflation dynamics related to the target and economic developments over the outlook horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets,” the central bank said on Friday.

“Given the monetary policy stance, annual inflation will return to the Central Bank of Russia’s target in the second half of 2022 and will remain close to 4 percent thereafter,” she added.

Russia’s tightening cycle began in March, and in April Central Bank Governor Elvira Nabiullina said a “serious and significant increase” in the key rate could be justified to tame inflation, the bank’s primary focus.

The ruble was trading slightly higher on Friday, with one dollar buying 71.58 rupees shortly after the central bank’s announcement. The Russian currency has risen 8 percent since mid-April on expectations of higher interest rates and a tightening in oil prices, and is at an 11-month high against the dollar.

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