On September 14, the Central Bank of Russia’s key rate went up to 7.5 %, the first hike in the key rate since December 2014. The CBR said its decision takes into account a rising inflation forecast and increased inflation risks. The updated forecast on inflation is mainly driven by the approaching VAT hike from 18 % to 20 % on January 1, 2019, as well as ruble weakness arising from geopolitical tensions and emerging market volatility. The forecast sees inflation at the end of this year running at around 4 % (previous forecast 3.5−4 %) and 5−5.5 % (previously slightly above 4 %) at the end of 2019. In 1H2019, the VAT increase could temporarily boost the inflation rate as high as 6 %, but the CBR expects inflation to subside to 4 % in 2020. Main inflation risks stem from highly uncertain external conditions and their impact on financial markets.
The CBR also decided to prolong the suspension of foreign currency purchases under the fiscal rule until year’s end. The CBR earlier said the purchase pause would last through September (see BOFIT Weekly 35/2018). The move is intended to stabilise ruble volatility and its influence on inflation. The CBR decision to resume foreign currency purchases under the fiscal rule will be made based on financial market conditions.