Three experts, including the former deputy chairman of the Central Bank, predicted that the key interest rate would stay at 18%. Four economists and financiers argued for a rise to 19–20% in the near term.
Sovcombank’s chief analyst, Mikhail Vasiliev, outlined three scenarios he considers equally plausible for the near future:
* Keep the base rate at 18% in September and hike to 20% in October,
* Increase to 19% in September and then to 20% in October,
* Jump to 20% in September and maintain that level through October.
Why might the Central Bank hold the rate?
According to Ilya Fedorov, chief economist at BCS World of Investments, pushing the rate higher carries substantial risks. If something unsettles the financial system and the economy slows sharply into a recession, policy tightening could backfire and prompt a rapid rate cut later. He noted that the economy reacts more slowly to hikes than to cuts.
Fedorov stressed that policy should be guided by the 2025 budget parameters and the scale of interest subsidies. The budget is not expected to be officially released until October. Between meetings, market moves are relatively quiet, so a pause until October would allow a clearer picture of how tight monetary policy needs to be for next year, he said.
He added that the central bank’s forecast would be updated in October with data through July-September 2024. In addition, a reduction in concessional mortgage programs would enable further policy tightening without raising rates. He pointed to July data showing concessional loans cut by nearly fourfold and unsecured lending retreating as part of this trend.
Dubinin remarked that after the rate rose to 16% on December 15, 2023, small shifts of 1–2 percentage points did not alter inflation trends and thus had limited regulatory impact. Following the 18% increase on July 26, 2024, prices showed little change, he observed.
Why might the Central Bank raise rates?
Vasiliev noted ongoing talk of lifting the key rate to 19% or even 20% for several reasons:
* Signals from the central bank itself,
* The pace of price increases. Inflation has remained above the bank’s 6.5–7% forecast, with August inflation staying within that range so far this year. In other words, inflation has not slowed as much as hoped while the base rate sits at 18%.
* Persistent inflation drivers such as a tight labor market, strong domestic demand, rising inflation expectations, and costs tied to sanctions,
* Rising inflation expectations among the public and businesses in August.
After the July 26 meeting, the bank raised its 2024 year-end inflation projection to 6.5–7% and its year-end average rate projection to 18–19.4%.
Vasiliev explained that if inflation hovers near 6.5%, the key rate could hold at 18%; if inflation trends toward 7%, a rise to 20% becomes more likely.
Vasiliev believes inflation could reach 7.1% by year-end, with risks skewing higher. In that scenario, he anticipates a rate increase to 20% this autumn.
What about deposits?
Current Russian bank deposit rates sit around 18–22% annually. Svetlana Frumina, a candidate of economic sciences and head of the global financial markets and fintech department at the Russian University of Economics, notes that deposits can reach up to 25% for longer terms. She points out that the sharpest hike in rates occurred during the 1995–1996 crisis, when rates touched 100%.
Vasiliev suggests that keeping the base rate steady would keep deposit profitability stable; a rate hike of a similar magnitude would push deposit yields higher as well. Vladimir Evstifeev, head of Zenit Bank’s analytics, advised placing funds for up to one year.
Frumina warns that higher deposit rates introduce two main risks: an outflow of capital from the stock market, which must grow to about 66% of GDP according to a government message, and a shift in demand from federal bonds to deposits, which could affect budget financing. She cautions investors not to rush out of equities, noting that with proper portfolio management, stock market returns can outperform deposits over the long run. Mishchenko from the Presidential Academy and a visiting professor at the Universidad Torcuato di Tella suggests diversifying by partially reallocating money to deposits to balance a portfolio.
What about loans?
The Moscow Exchange’s Financial Services department reports that consumer loan rates across the 20 largest banks rose by 1.1 percentage points to 20.94% in late August. The central bank’s July 2024 data show housing loan rates at 10.22%, a peak not seen in five years. Credit costs tend to track the policy rate; Vasiliev notes that keeping the rate at 18% would limit further increases, while a jump to 19–20% would push credit rates higher. He advises Russians to consider borrowing now.
Mishchenko expects consumer loan rates to rise to 25–30% and mortgage rates to 12–14% after September 13. He adds that a return to low loan costs is unlikely before 2025, suggesting shoppers focus on bank promotions and loan refinancing strategies to secure favorable terms.
Vasiliev also forecasts that borrowing costs will remain elevated for an extended period, with an average key rate around 17.4% this year and about 17.8% in 2025.
What about the ruble?
Vasiliev believes that maintaining the rate at 18% would have little immediate impact on the ruble’s exchange rate. If the rate rises to 19–20%, a modest strengthening of the ruble could occur.
Experts project the dollar’s average July–September rate to be around 89 rubles, the euro around 97 rubles, and the yuan about 12 rubles. For October–December, the dollar is expected near 90 rubles, the euro near 99 rubles, and the yuan around 12.5 rubles.
Mishchenko notes that the ruble could temporarily strengthen after a policy decision but is likely to end up fluctuating, with the dollar trading around 87–90 rubles. Ongoing geopolitical risks and structural issues in the economy limit a substantial, lasting ruble rally, unless external conditions improve. Frumina adds that the exchange rate will also hinge on government decisions and shifts in oil and gas revenues, which form a large share of federal budget income. She warns that the ruble could weaken if higher rates coincide with a drop in oil and gas prices.