For the second time in a row, the Bank of Russia raised the key rate by 0.5 percentage points to 5.5% per annum, according to the regulator's statement.
"On 11 June 2021, the Bank of Russia Board of Directors decided to increase the key rate by 50 b.p., to 5.50% per annum. Both the Russian and global economies are recovering faster than expected. Inflation is developing above the Bank of Russia’s forecast," the statement reads.
"The contribution of persistent factors to inflation is increasing due to faster growth of demand compared to output expansion capacity. Over a short-term horizon, this influence is strengthened by price growth in global commodity markets. Taking into account high inflation expectations, the balance of risks has significantly shifted towards proinflationary ones," the regulator said.
Annual inflation in Russia as of June 7 increased to 6.15%, which is higher than forecast, the Bank of Russia noted. "Inflation is developing above the Bank of Russia’s forecast. In May, seasonally adjusted consumer price growth accelerated significantly, with annual inflation growing to 6.0% (vs 5.5% in April). According to estimates as of June 7, annual inflation went up to 6.15%. Based on the Bank of Russia’s estimates, indicators reflecting the most sustainable price movements also rose in May and substantially exceed 4% (annualized)," the regulator said.
According to the regulator's estimates, increased inflationary pressure may lead to a more significant and prolonged deviation of the indicator from the target in the context of the final economic recovery. This creates the need for a further increase in the key rate at the next meetings. At the same time, the Bank of Russia sees a trend towards an increase in deposit rates in the banking market, which "will make it possible to raise the attractiveness of bank deposits for households, protect the purchasing power of savings, and ensure balanced lending expansion".
The Bank of Russia also noted that economic activity in Russia is recovering faster than expected. "According to the Bank of Russia’s estimates, consumer activity has generally reached its pre-pandemic levels. The household services sector continues to recover actively. The Bank of Russia estimates that output has exceeded its pre-pandemic levels in most sectors of the economy. Demand for labor force is growing in a wide range of industries, with certain sectors experiencing a deficit," the regulator said.
The Bank of Russia Board of Directors will hold its next key rate review meeting on July 23, 2021.
