MOSCOW – The Russian central bank, on Friday, said it was raising its main refinancing rate 0.25 basis points to eight percent, its first hike in interest rates since the economic crisis over two years ago. The Bank of Russia said in a statement that the rate hike, effective from Monday, was needed due to expectations of higher inflation in Russia and high global oil prices.
“The decision was taken due to continued high inflation expectations,” it said in a statement. The rate hike was the first since December 2008, when the economic crisis was starting to rock the country. The bank subsequently imposed 14 consecutive rate cuts to help bring the economy out of the slowdown.
The Russian government, under Prime Minister Vladimir Putin, has in the last years worked hard to bring down the sky-high inflation which dogged the country after the collapse of the Soviet Union. But inflation worries have returned in the last months after a summer heat wave and fires destroyed over a quarter of the harvest, creating price pressures as the supply of basic food items on shop shelves fell.
The Bank of Russia said that inflation was 9.7 percent in the period to February 21 compared with the year earlier. “Inflationary pressure remains significant,” it warned. It said the recovery in Russia was showing contrasting tendencies, with industrial production posting stable growth for several months in a row but investment volumes falling substantially in January.
“There has also been a fall in incomes and consumer demand,” it added. Underlining difficulties of containing inflation without impeding growth, the bank said that future monetary policy would be determined by the risk of high inflation on one side and a slowdown in growth on the other. “This hike was a surprise,” said Analyst Maria Pomelnikova, at Trust Bank.
“This means that the possibility of an acceleration in inflation is causing more fear than the risks for economic growth,” she added. She added that the Bank of Russia would “now use all means at its disposal” to fight against inflation and predicted it would agree another rate hike at its next meeting in March. Russia is one of the first major economies to move into a rate tightening cycle, along with China’s central bank which has now raised interest rates for the third time in four months.
The European Central Bank has not imposed a rate hike since July 2008 while the the Bank of England has held rates at a record low of 0.50 percent since March 2009. But European central banks are under pressure from some analysts to hike rates soon amid signs of growing inflationary pressures in Europe. Russia was hard hit by the economic crisis that broke in 2008 as its heavily industrial and hydrocarbon-dependent economy showed its vulnerability to economic shocks.
However, the government succeeded in avoiding a repeat of the 1998 financial crisis when its economy went into meltdown and the economy posted respectable if modest growth of four percent in 2010. Analysts have warned that Russia faces year after year of below-par growth unless it modernises the economy and limits its dependence on hydrocarbon exports.
Finance Minster Alexei Kudrin said this week the country is at a “historic moment” that will decide its future destiny. State Statistics service Rosstat, meanwhile, said that Foreign Direct Investment (FDI) in Russia in 2010 fell 13.2 percent to $13.8 billion, the third year in a row that it has gone down.
