Sergey Drobyshevsky on the causes and consequences of the record key rate rise

The persistence of high current inflation rates (above 8% year-on-year) and high inflation expectations of economic agents was the main reason of the Bank of Russia for the increase in the key rate at the meeting on October 25. The impact of the key rate and anti-inflationary policy of the Bank of Russia can already be observed: inflation peaked in July (about 9.2% for the year), and now we see a downward trend, however, to consolidate it requires maintaining a high key rate. The current inflation rate of 8-9% per annum probably does not have devastating consequences for the economy, but it should be clearly understood and not separated that inflation remains at or below 9% precisely because of the high key rate and the Central Bank's policy.

Economic and mathematical modeling shows that if the key rate was much lower, as suggested by a number of experts (for example - 10%), then inflation would be, on the contrary, closer to 20% in annual terms, and at such rates of inflation, both the population and business would suffer real losses of their wealth. There is simply no alternative in the form of a low key rate and current inflation level. Of course, the current key rate limits the availability of credit, but its high level predetermines the rate of inflation decline, and as inflation declines, both the key rate and credit rates will also go down and the availability of credit will be restored.

It is too early to make forecasts regarding the key rate change at the December meeting of the CBR Board of Directors, the situation is changing dynamically, we will see how much inflation will decrease as of the end of November. In a favorable scenario, in our opinion, there is no need for further increase in the key rate, but if price growth remains high, it will require a tightening of the policy of the Bank of Russia.

Assessing the overall impact of the CBR rate on the Russian economy, we would like to note that the forecast of the Ministry of Economic Development of Russia for 2025-2027 has already considered the maximum negative, in our opinion, response of the economy to a high key rate. The forecast for 2025 (GDP growth rate at 2.5%, fixed capital investment growth at 2.1%) can be considered quite conservative. Let's not forget that for the last two years (2023 and 2024) the initial forecasts of the Ministry of Economic Development of Russia were noticeably lower than the totals, and, in our opinion, the 2025 results may also be more positive than our current expectations.