Russia Decided to Raise the Key Rate to 7.5% Per Annum

Statement by the Chair Woman of the Bank of Russia Elvira Nabiullina on the results of the meeting of the Board of Directors on September 14, 2018.

In recent months there has been a significant change in external conditions, resulting in increased inflationary risks. In order to limit the impact of these factors on price and financial stability, the Bank of Russia today adopted two decisions.

First. The Board of Directors of the Bank of Russia decided to raise the key rate to 7.5% per annum to limit inflation risks. These are the risks of rising prices and inflationary expectations in response to exchange rate volatility. Do not forget about the upcoming increase in VAT. We will assess the feasibility of further raising the key rate, given the dynamics of inflation and the economy relative to the forecast, as well as the risks from external conditions and the reaction of financial markets to them.

The second solution is aimed at stabilizing the situation on the financial market. We decided to suspend until the end of this year the purchase of foreign currency in the domestic market as part of the budget rule. In the future, we will make a decision to resume regular purchases, assessing the actual situation in the financial markets.

After the resumption of regular purchases, we will assess the possibility of holding purchases of foreign currency postponed this year. In this case, the beginning of regular and deferred purchases may not coincide in time. According to our estimates, deferred purchases can last for more than one year.

Of course, the suspension of purchases will have an impact on the balance of payments and exchange rate dynamics. We took this into account when preparing the forecast and when deciding on the key rate.

At the current oil prices, the current account of the balance of payments by the end of the year will amount to about $ 30 billion, which is twice as much as the forthcoming payments on external debt ($ 15 billion). At the same time not less than half, most likely, will be refinanced. Thus, we have a considerable margin of safety from the current account. In these circumstances, the decision to suspend the purchase of foreign currency on the domestic market will limit the exchange rate volatility and its impact on the dynamics of inflation in the coming quarters.

Now I will dwell in more detail on the factors that took into account the Board of Directors, making a decision to raise the key rate.

First, inflationary risks from external conditions were realized. As a result, the inflation forecast was upgraded even taking into account the decisions made today. We expect inflation in the range of 3.8-4.2% in 2018, 5-5.5% in 2019, with a return to 4% in 2020.

The deterioration of external conditions is associated with a number of reasons. In August, geopolitical factors changed, and uncertainty about sanctions against Russia increased. Increased geopolitical risks were imposed on the outflow of capital from developing countries. During spring and summer, in a number of emerging market countries, imbalances that had accumulated earlier were sharply manifested, which affected their financial markets, exchange rates, and basic macroeconomic indicators. This development of events, when it seizes not one but several countries, reduces the tendency of international investors to take risks and leads to capital outflow from emerging markets as a whole. Especially when interest rates are rising in developed countries.

The weakening of the ruble in August and early September entails a rise in prices for goods and services. The Bank of Russia’s assessment of the effect of transferring the exchange rate to annual inflation has not changed and is about 0.1 (one-tenth), that is, a 10% drop in the nominal effective exchange rate adds 1 percentage point to the annual inflation rate on the horizon of 3-6 months. To date, from the beginning of the year, the nominal effective rate, according to our calculations, has decreased by approximately 9%, which will contribute to the annual inflation of about 0.9 percentage points.


According to the forecast of the Bank of Russia, annual inflation will increase from 3.1% in August to 3.8-4.2% by the end of this year. It will accelerate further in the first half of 2019, when the main effect of the VAT increase will appear, and then the rate of price growth will begin to decline.

The decision taken at the key rate, along with the suspension of the purchase of foreign currency on the domestic market, allows to limit the growth of annual inflation to 5-5.5% in 2019. Inflation will return to 4% in the first half of 2020, when the effects of rising VAT and exchange rate dynamics will be exhausted.

The second factor that we took into account is the increase in inflation expectations and the high uncertainty of their future changes.

Inflationary expectations of the population increased in May and remained in the summer months at this elevated level, while the business continued to grow. The weakening of the ruble, which occurred in August, could lead to an additional increase in inflation expectations.

At the end of the year, the reaction of inflationary expectations to the upcoming VAT increase is very likely. Polls show that the expectations of the population have not yet begun to take into account it. At the same time, enterprises are already laying down in their expectations a decision to increase VAT, along with exchange rate dynamics.

Hülya Karahan: The Founder