(March 21): Russia’s central bank held borrowing costs at a historic high for a third meeting, again signaling that it’s prepared to tighten monetary policy further to fight persistent inflation.

The Bank of Russia kept the the key interest rate at 21% on Friday. The move was forecast by all economists surveyed by Bloomberg. 

“The Bank of Russia will continue to assess the speed and sustainability of the decline in inflation and inflation expectations,” the central bank said in a statement announcing the decision. “If disinflation dynamics do not ensure achieving the inflation target, the Bank of Russia will consider raising the key rate.”

Governor Elvira Nabiullina will hold a briefing at 3pm Moscow time.

While annual inflation hovers around 10%, the Bank of Russia earlier pointed to a significant slowdown in seasonally adjusted price growth at the start of the year compared with December. For non-food products, the measure slowed by half due to rouble gains triggered by optimism over US-Russia negotiations on ending the war against Ukraine. 

The central bank had maintained its harsh rhetoric at last month’s meeting, suggesting it could tighten policy even more. Deputy governor Alexey Zabotkin said about a week before Friday’s decision that officials would still “assess the need for further key rate increase” as promised, but “most likely, a higher real rate is not necessary,” the Interfax news agency reported.  

Inflation expectations, a key measure for rate setters, declined in February for the first time in five months. In March, the indicator slid further to 12.9% compared to 14% in January, central bank data published on Wednesday showed. 

The labour market, which had been a key driver of inflation due to a severe shortage of workers, is showing early signs of improvement, with unemployment edging up in January for the first time in more than a year.

Weekly inflation slowed to its lowest since September in the week before the meeting, according to Federal Statistics Service data. In annual terms, price growth remained at 10.1%, the Economy Ministry said.

“Recent inflation data aligns with the central bank’s 7-8% year-end projection. Additionally, an abrupt drop in the composite PMI reading and the ruble gaining will see the board start nudging market expectations toward a rate cut in the second quarter,” says Alex Isakov, Russia economist at Bloomberg Economics.

Still, the central bank highlighted in a March report that a further slowdown in inflation “is still in question.” Local demand remains high despite slowing lending growth. 

Moreover, the credit slowdown could be temporarily caused by advance payments on state contracts from the Finance Ministry, which companies used to repay loans. It will only be possible to make a conclusion in March or April, when there is no seasonal surge in budget expenditures, the report said.

The central bank will hold its next monetary policy on April 25, according to the statement.

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