Bank of Russia signals slower inflation, maintains high rates amid cautious outlook

The Central Bank announced its decision by noting that inflation pressures have eased since the autumn of 2023 but remain elevated. Domestic demand continues to outpace the ability to expand production of goods and services, making it premature to judge the durability of the disinflationary trend. The regulator emphasized that the monetary policy stance will reinforce the effort to curb inflation across the economy. Press release.

According to the Central Bank, seasonally adjusted price growth for December 2023 to January 2024 averaged 6.6 percent year over year, down from 11.5 percent in the autumn months. The core inflation rate likewise fell to 7 percent from 10.2 percent in the autumn period.

Officials noted that the slowdown largely reflects the tightening monetary policy. By February 12, the annual inflation rate was near December 2023 levels, estimated at 7.4 percent due to base effects.

compromise solution

Analysts viewed the Central Bank’s rate decision as in line with market forecasts from financial participants.

What is the key rate

The key rate, formerly called the floor, represents the minimum borrowing cost at which commercial banks can obtain loans from the Central Bank and lend to businesses and the public. This instrument is the primary tool of monetary policy used by the Bank of Russia. The rate is set by the board of directors, which includes the Bank of Russia Governor and 14 regulatory experts, and its members are approved by the State Duma for five-year terms. The board meets quarterly on a pre-arranged schedule.

Occasionally the Central Bank may call an extraordinary meeting to decide on the rate, such as the emergency session on February 28, 2022 when sanctions were imposed. At that time the rate jumped to 20 percent per annum. Later adjustments followed, and by July 21, 2023 the cycle of increases resumed in response to high inflation and expectations. Since 15 December 2023 the basic rate has stood at 16 percent, and the regulator left it unchanged on February 16. The next rate meeting is scheduled for March 22, with a press release on the decision published at 13:30 Moscow time.

Inflation slowed between December and January compared with the autumn months but remains well above the 4 percent target. Therefore, the Bank is expected to maintain the high rate until inflation and expectations show sustained decline, noted Mikhail Vasiliev, chief analyst at Sovcombank.

Vasiliev added that persistent risks could leave inflation elevated for longer, influenced by labor market shortages, ruble volatility, and rising inflation expectations. He explained that the high rate is intended to cool demand for loans and curb consumer price growth while keeping inflation near the target.

He projected that returning to the 4 percent target before 2025 is unlikely, predicting a peak around 8.4 percent in July due to tariff changes in utilities and a gradual slowdown to about 6 percent by year-end. The analyst also warned that risks may shift toward higher inflation.

Denis Perepelitsa, an economist at the Russian University of Economics GV Plekhanov, described the Bank’s approach as a balance between controlling price growth and preserving business credit opportunities. He noted the central bank aims to prevent price pressures from becoming entrenched while maintaining lending stability.

What is expected from the Central Bank next?

The Bank of Russia’s rhetoric has softened somewhat since the December meeting, when the key rate rose by 100 basis points to 16 percent. The current communication points to a slower inflation trajectory and easing inflation expectations, while signaling that tight monetary conditions will persist. The regulator also raised its forecast for the average key rate in 2024 to a range of 13.5 to 15.5 percent, up from 12.5 to 14.5 percent.

Vasiliev suggested the average rate this year might land around 15.1 percent. With a stable ruble and tight policy, price growth is expected to slow further in the coming months. Analysts anticipate the March 22 meeting will keep the rate at 16 percent, with a possible cut only in the third quarter.

In a baseline scenario, the rate could be lowered to about 12 percent by year-end, reflecting a more sustained easing path if inflation remains under control.

What will happen to the ruble exchange rate?

The decision largely aligned with market expectations and is not seen as altering the ruble’s direction in the near term. A high 16 percent key rate is likely to support the ruble by dampening imports and reducing demand for foreign currency. Higher local deposit rates further strengthen savings in ruble terms. Economic analysts also pointed to external factors such as exporters selling currency to meet tax obligations and inflation expectations, which could influence the currency in March.

One economist noted that the ruble could remain in a narrow range, suggesting it is prudent to secure foreign currency for travel ahead of trips abroad.

What will happen to deposit interest rates?

Deposit rates typically track the central rate. If the Bank of Russia raises the key rate, deposit rates tend to rise as well. Holding the rate at 16 percent might not drastically change banking products, but savers should anticipate a prolonged period of tight policy. Analysts forecast deposit rates remaining in the high single digits to mid-teens through 2024 and possibly into 2025, with gradual declines in 2024 as inflation eases.

Experts anticipate rate stability for most of 2024, with some moderation in the latter months. Depending on maturity, average March rates might be around 15-16 percent for short terms and about 14-15 percent for longer durations. Those with funds ready to invest could consider deposits aligned with their preferred term and rate.

What will be the loan interest rates?

Loan costs rise with a higher key rate, and banks often reflect expectations in lending rates in advance. Higher borrowing costs tend to curb business activity and dampen economic momentum. Post-decision analyses expect cash loan rates near 25 percent and housing loan rates around 17 percent, with vehicle loans ranging from 18 to 25 percent. These levels follow the December rate increase of 100 basis points to 16 percent and illustrate how policy moves influence credit markets.