Central Bank raises key interest rate on 150 basis points

On October 31st of the current year the Central Bank announced about the increase of the key interest rate on 150 basis points from 8 to 9.5% at once. The Bank of Russia explains such decision with the sharpening of external conditions in September and October 2014. Reduction of prices on oil and the toughening of sanctions against a number of large Russian companies were accompanied by the ruble depreciation that has led to a growth acceleration of consumer prices together with the food embargo.

According to the expectations of the Central Bank, the inflation in Russia will rise beyond 8% until the end of the first quarter of 2015 and the economic growth rate will be close to zero. So, the Bank of Russia estimates the annual GDP growth rate in the third quarter of the current year was 0.2%. At the same time, the banking regulator notes that deceleration in economic growth has no significant restraining influence on inflation changes yet. The Central Bank also notes that these phenomena have structural character.

At the same time, representatives of the Central Bank point out that absorption of the production factors (labor force and competitive manufacturing capacity) is on a high level. However, labor capacity decelerates due to the decrease in supply of labor force because of long-term demographic changes of previous years.

The Bank of Russia notes a disinvestment in fixed capital among the external factors that have a negative impact on economic activity. That happened because of the restricted availability of long-term financial resources and the requirement toughening for quality to credited parties of Russian banks. In such a case there is a cooling of consumer demand resulting from the growth slowdown of real wages and retail lending.

In addition to this, the banking regulator raised the rates of the following instruments for bank liquidity extension: continuous operations (fixed interest rates) from 9% to 10.5%, and the three month auctions for credit extension provided by non-market assets from 8.25 to 9.75% and deposit operations from 7 to 8.5%.

It bears reminding that it is not the first increase of the key interest rate this year. The same resolution was carried in March by the banking regulator with the raising of interest rate from 5.5% to 7%. Then the interest rate was increased twice on 50 basis points. However, for the first time the banking regulator announced its readiness to move to the quantitative monetary easing in the case of external conditions improvement and the formation of a stable trend to the decline in inflation.