Russia: Cautious monetary tightening

5 min

The Central Bank of Russia (CBR) raised its key policy interest rate by 25bp to 7.50% last week, bringing an end to the monetary easing cycle that began in February 2015. The latest move reflects that the CBR expects annual inflation to return to its 4% target faster than initially thought, after consumer prices rose by +3.1% y/y in August, up from +2.5% in July, mainly driven by food price inflation and the weakened RUB. The currency lost -8% vs. the USD in August alone after the announcement of new, tougher U.S. sanctions against Russia at the start of that month. The CBR also expects advanced price increases by some companies later this year ahead of the VAT hike from 18% to 20% at the start of 2019. Euler Hermes expects annual consumer price inflation to reach about +3.8% at end-2018 and to average +4.4% in 2019. The CBR forecasts somewhat higher inflation next year; hence we expect further monetary tightening, especially in H1 2019.