Russia's central bank raised its benchmark rate by larger-than-expected 200 basis points and also hinted at another hike next month as inflation expectations increased and additional fiscal spending lifted proinflationary effects.

The board of directors, led by Governor Elvira Nabiullina, raised the key rate to a record 21.00 percent from 19.00 percent.

The bank has raised the key interest rate by 1,350 basis points since July 2023.

The board observed that further tightening of monetary policy is required to ensure the return of inflation to the target and reduce inflation expectations. "The Bank of Russia holds open the prospect of increasing the key rate at its upcoming meeting," the bank said in a statement.

Inflation is expected to be in the range of 8.0 percent to 8.5 percent by the end of 2024. Annual inflation is projected to slow to 4.5 percent -5.0 percent next year and 4.0 percent in 2026, and stay at the target further on.

The bank noted that inflation expectations increased considerably mainly as a reaction to the current high inflation. Further, growth in domestic demand is outstripping the capabilities to expand the supply of goods and services.

Moreover, additional fiscal spending and the related expansion of the federal budget deficit in 2024 have proinflationary effects, policymakers observed.

Today's hike is evidence that despite President Putin's efforts at this week's BRICS summit to portray Russia's economy as watertight - the war is creating significant challenges for policymakers, Capital Economics' economist Nicholas Farr said.

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