This exerted additional pressure on inflation. In response, the Central Bank significantly tightened monetary conditions.
“In order to support the ruble and to prevent financial instability on the market Russian Central Bank was forced to hike interest rates by 250 basis points during this year. This is a huge move, and the key rate now stands at 8 percent compared to 5.5 percent previously. It would help to tame inflation, which accelerated in the second half of this year,” Oleg Kouzmin, RenCap’s analyst in Moscow, said.
However, this particular policy increased domestic borrowing rates and further restricted access to domestic credit for investors and consumers. Analysts warn this could constrain the investment activity in the country, which has stayed in the red zone for quite a while already, even before the sanctions were put in place.
At its latest board meeting in mid-September, the Central Bank left the key rate on hold at 8 percent, though noting that it would further tighten policy if threats to its 4 percent medium-term inflations targets emerge. The next meeting is due to be held on October 31st, while market watchers say that recent ruble dynamics bring expectations of further rate hikes back on the street.
Meanwhile, slumping oil prices might change the CBR’s monetary policy in the nearest future. Just recently, Chairwoman Elvira Nabiullina said the bank could include a crisis scenario of lower oil prices into its monetary policy draft until 2017.
“We are currently working out an additional fourth stress scenario, which implies a rapid, more significant decrease in oil prices during the forecast. We consider the possibility of including the scenario into the draft at the next stage of development the main guideline,” Elvira Nabiullina said.
Previously, the draft included three macroeconomic scenarios, none of which accounted for a rapid decrease in oil prices. The basic monetary policy scenario envisages the Urals oil price rising to $104.8 per barrel from around $95 per barrel now.
