Russian Central Bank's decision to retain key rate at 21% pa option least expected by market

MOSCOW. Dec 20 (Interfax) - The board of directors of the Central Bank of Russia on Friday retained the key rate at 21% per annum, a decision that the market had least expected, thus the regulator has halted raising the rate after the three consecutive hikes previously at 2 percentage points in July, 1 pp in September, and 2 pp in October.

Market analysts were confident that the CBR would hold the line and continue tightening monetary policy at the year's final board meeting despite growing outside pressure. Meantime, analysts' estimates varied on the degree of a hike, mostly converging at 23% pa, with forecasts including even tighter options of 24% pa and 25% pa, as well as looser options. The option to retain the key rate was extremely rare in forecasts and was mentioned as rather unlikely.

The Central Bank directly indicated the possibility of a December rate hike following the October meeting, and subsequently confirmed the signal, though stipulated - as the regulator had done ahead of the previous board meeting, when the CBR hiked the rate 2 pp - that the decision was not predetermined. The development of the situation since the last meeting has not provided grounds to expect an uncharacteristic looseness from the regulator. Although the period of the ruble weakening sharply was rather short-lived and the overheated growth rates in lending began to slow down finally, inflation and inflation expectations remained high. The Federal State Statistics Service's (Rosstat) latest data indicate that Russia had inflation of 0.35% from December 10 to 16 after 0.48% from December 3 to 9 and 0.50% from November 26 to December 2. From the beginning of the month, price growth was 0.97% by December 16 and 9.14% since the beginning of the year, meaning that the Central Bank's forecast of 8%-8.5% for the year, which the regulator had updated in October, was in the review mirror with two weeks remaining in the year. Annual inflation as of December 16, as follows from calculations based on Rosstat data, accelerated to 9.50% from 9.32% on December 9 (8.88% at the end of November) when calculated from weekly dynamics (the methodology followed by the Central Bank).

The Central Bank published operational data on the inflation expectations of households and businesses ahead of the board meeting. Household expectations rose to 13.9% in December from 13.4% in November to the highs of 2024. Russian enterprises' inflation expectations also increased in December to a maximum.

The Central Bank explained the unexpected decision for analysts in the first paragraph of its statement as follows: "There was a more significant tightening of monetary conditions than was assumed by the October decision on the key rate. This was facilitated by factors independent of monetary policy. According to the Central Bank of Russia, taking into account the significant growth of interest rates for end borrowers and the cooling of credit activity, the achieved tightness of monetary conditions creates the necessary preconditions for the resumption of the disinflation process and the return of inflation to the target, despite the increased current growth in prices and high domestic demand."

Large Russian businessmen and companies, summing up the results of the year and making plans for 2025, increasingly talk about the restraining effect of tight monetary policy. The high rate was one of the topics at a recent meeting of President Vladimir Putin with entrepreneurs. The issue was also raised at his final press conference the day before the Central Bank board of directors. Putin said that Central Bank Governor Elvira Nabiullina does not tell him what the key rate would be. "She herself probably does not know this yet, because they discuss it at the meeting of the board of directors, at their 'Komsomol cell', and they reach a final decision during the discussion," he said, expressing hope that the decision "will be balanced and will meet the requirements of today."

The signal about the future direction of the monetary policy in October was that, "Further tightening of monetary policy is required in order to ensure that inflation returns to the target and to reduce inflation expectations. The Central Bank of Russia allows for the possibility of raising the key rate at the next meeting [in December]."

The new signal has remained hawkish in form, though the content has softened compared to October, which gives grounds - if a certain scenario is realized in the next two months - to consider 21% pa not as an intermediate stage, but as a possible peak in tightness in the monetary policy cycle.

"The Central Bank will assess the advisability of raising the key rate at the next meeting, taking into account the further dynamics of lending and inflation," according to the statement.

The December meeting of the Central Bank's board of directors on monetary policy is not a pivotal meeting, meaning that the regulator is not publishing a medium-term macroeconomic forecast at this time. The traditional press conference of the Central Bank Governor was held at 3 p.m. Moscow Time, and the Central Bank will publish a summary of the discussion of the key rate on December 28.