Russian Ruble Likely to Hit 75.76 Against Greenback as Rate Hike Misses Expectations

The Central Bank of Russia increased its benchmark interest rate by 25 basis points to 6.75%, despite market expectations for a larger 50 basis point increase, stating that the balance of threats for inflation is sloped to the plus side and that the prevailing monetary policy position is geared at limiting this threat and returning inflation to 4%. Policymakers also observed that the Country’s economy returned to pre-pandemic levels in 2Q21 and is now on a course for effective development.

The central bank said that there was still space for additional key rate increases at its forthcoming sessions, with the current estimates indicating that annual inflation would drop to 4.0% – 4.5% in 2022 and will stay close to 4% in the future. Russia’s GDP increased 10.5% year on year in the 2Q21, above early expectations of 10.3% growth and reversing a four-year spell of decline.

It was the fastest growth rate since Q3 2000, with the economy resuming pre-pandemic levels aided by a recovery in global commodities prices. In July 2021, Russia had a trade surplus of $2,319,1 million. Russia’s yearly inflation rate increased to 6.7% in August this year, up from 6.5% the prior evious month, above market forecasts of 6.6 percent.

It was the highest inflation rate since August 2016, driven by food (7.7%), non-food (8.0%), and service costs (3.8%). Consumer prices increased 0.2% on a monthly basis, after a 0.3% increase in July. The Bank of Russia raised its benchmark interest rate by a lesser amount than anticipated, but left the door wide open to future tightening after inflation reached a five-year peak in August.

Elvira Nabiullina, Governor of the Bank of Russia, is slowing the rate of monetary tightening as the economic rebound falters. The central bank has raised interest rates by a total of 250 basis points in 2021 with an aim of keeping inflation under control, although the inflationary pressure is running far over goal. Amongst the most severe tightening routes in developing economies has so far unable to curb price rise, and August statistics indicate Russia’s economic rebound may be failing.

Parliamentary election in the forthcoming week complicate matters further, and President Vladimir Putin’s promise of almost 700 billion rubles ($9.6 billion) in additional social expenditure adds to the possibility of pricing pressures. Ten-year bond rates increased two basis points to 7.04%. The ruble maintained its 0.2 percent rise versus the dollar, putting it on track for a third day of advances as crude oil climbed and other emerging-market currencies strengthened.

As per Clemens Grafe, an analyst at Goldman Sachs (NYSE: GS), inflation is expected to rise further and peak at 6.9% in September before falling to roughly 6% by the end of 2021, standing far over the central bank’s 4% goal.