Recently, the Bank of Russia made a surprising decision to keep its key interest rate at 21%, defying market expectations that anticipated further rate hikesThis decision reflects the central bank's belief that the effects of its previous aggressive interest rate increases are beginning to materialize, and the outcomes have exceeded their own forecastsOfficials indicated that although prices continue to rise and domestic demand remains robust, the restrictive monetary policy environment has laid the groundwork for inflation to return to target levels, with hopes for a noticeable decline in inflation by early 2025.

Since the second half of 2024, the Russian economy has seen an intensified "heat" translating into rising prices, pushing inflation rates upwards, with annual levels once exceeding 9%. In response, the central bank has implemented three rate hikes to curb price growth

However, the effectiveness of these measures has been questioned; data indicates that since October 2024, inflation levels have again surged, with price increases accelerating rather than diminishingConsequently, the market anticipated that the central bank would announce another rate increase in light of the broader economic landscape and recent statements from the bank.

The burden of inflation currently weighs heavily on Russian societyThe central bank's report indicates that the seasonally adjusted average annual price growth rate from October to November 2024 was 11.1%, intensifying the persistent inflationary pressuresParticularly alarming is that the average core inflation rate during this same period rose to 10.9%, compared to just 7.6% in the prior quarterWeekly data since December has also shown an ongoing increase in inflationary pressures.

Elvira Nabiullina, the Governor of the Bank of Russia, noted that in recent months, inflation has accelerated significantly

• Rethinking Inflation: New Perspectives Emerge
• Embracing Long-Termism in the Age of AI
• Interest Rate Changes and the Economy
• AWS Powers Generative AI Implementation
• Surge in Global Oil Prices Doubles Gasoline Costs

On one hand, this is significantly influenced by short-term factors, particularly poor weather conditions that have drastically affected crop yields, consequently driving up the prices of certain foods, especially vegetablesOverall, she emphasized that the high inflation observed in the initial weeks of October to December 2024 is largely the result of overheating domestic demand over previous quartersOn the other hand, inflation expectations continue to exert pressure on pricesThe expectation of increased demand has fostered high inflationary forecasts, which in turn perpetuates further inflationary expectationsIn this context, even transient inflationary factors can lead to sustained price pressuresBy December, consumer and business inflation expectations had risen, prompting analysts to revise their forecasts for inflation in 2025-2026 upwards.

During an annual live broadcast on December 19, Nabiullina highlighted the current inflation rate hovering around 9.2% to 9.3%, while real wage growth stands at just 9%. She cautioned that this inflation level is a signal that requires attention, pointing out that the mismatch between supply and demand is a primary driver of price increases

Additionally, rising international prices and transportation costs incurred due to sanctions further worsen domestic inflation.

The Bank of Russia's decision to refrain from increasing interest rates stems from multiple factorsThe effects of tightening monetary policy began to emerge in November 2024, evidenced by a noticeable slowdown in overall loan growth and the first decline in corporate loan growth rates in a long timePreliminary data indicated that lending activity continued on a downward trend in the weeks leading up to DecemberConcurrently, rising deposit rates have encouraged increased savings among the publicThe regulatory body anticipates a decrease in loan growth rates in 2025, suggesting that banks will adopt a more conservative approach in assessing borrower risksNabiullina remarked, “We are seeing a clear slowdown in credit, which will produce significant disinflationary effects

Given the accumulation of inflation inertia and the lagging nature of monetary policy, these effects will gradually become apparentWith the tightening monetary policy gaining traction, we expect inflationary pressures to begin to ease steadily.”

In the Duma, financial markets representative Anatoly Aksakov noted that the central bank's decision to maintain the key rate is a signal of a potentially shifting trendHe stated that the persistent tightening of monetary policy is producing positive outcomes, examples of which include a slowdown in retail lending, an increase in public savings, and a decline in corporate loan growth ratesAksakov forecasts that, by early 2025, as consumer demand starts to cool, inflationary pressures will ease further, enhancing the effectiveness of the tight monetary policy and creating conditions for potential rate cuts by the central bank in the future