Russia Central Bank Signals July Rate Hike

(RTTNews) - The Russian central bank left unchanged its key interest rate for the fourth successive policy meeting on Friday amid persistent inflationary pressures and strong domestic demand and signaled a possible rate hike in the upcoming meeting.

The board of directors of the Bank of Russia, headed by Governor Elvira Nabiullina, decided to hold the key rate at 16.00 percent.

The next policy session is on July 26.

The policy board emphasized that maintaining tight monetary conditions would be necessary to bring inflation back to the target level by 2025 and stabilize close to 4 percent further on.

"The June inflation figures will likely be key in determining whether there is a rate hike in July," Capital Economics economist Liam Peach said.

"With strong price pressures to continue for a bit longer we think a 100bp hike, to 17.00 percent, is more likely than not at this stage."

Recent official data revealed that Russia's consumer price inflation rose to 8.1 percent in May from 7.8 percent in April.

Inflation has stopped decreasing and remains close to the levels of the first quarter, the bank said.

The seasonally adjusted annual price growth was 5.8 percent on an annualized basis in April, slightly up from the 5.7 percent average in the first quarter. Core inflation, excluding volatile items, had also risen to 8.3 percent.

Growth in domestic demand is still outstripping the capability to expand the supply of goods and services, the bank said in a statement.

The Russian economy showed robust growth in the first quarter of this year as consumer activity was positively influenced by increased household incomes and positive sentiment, alongside strong investment demand from businesses.

However, the economy's rapid growth deviated significantly from a balanced growth path, exacerbated by labor shortages and historically low unemployment rates, the bank observed.

The Bank of Russia also noted that the planned changes in tax policy mean that higher budget expenditures in the coming years will be funded from higher consolidated budget revenues, in line with the fiscal policy normalization planned for 2025. These changes were expected to have a neutral effect on inflation.