Due to inflation rising beyond expectations, the Central Bank of Russia raised interest rates for the first time this year.

On Friday, July 26th, the Central Bank of Russia announced an interest rate hike, increasing the benchmark interest rate from 16% to 18%, a 200 basis point increase, which was in line with market expectations.

Recently, inflation in Russia has soared, beginning to deviate from the 4% inflation target set by the Central Bank of Russia, leading the bank to make the first interest rate hike decision of the year.

Food and fuel costs have significantly driven up inflation. The latest data shows that due to unexpected frost, Russia's seasonally adjusted food inflation in June reached 12.3%, a sharp increase of 4 percentage points from May; due to drone attacks on refineries, coupled with strong seasonal demand, fuel prices have also risen strongly.

The increase in import costs is also a key reason for the rise in prices. The Central Bank of Russia stated:

"The inflation risks caused by difficulties in cross-border payments offset and exceeded the anti-inflationary effects brought about by the appreciation of the ruble."

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In addition, inflation expectations for businesses and households have also increased. The 12-month inflation expectations closely monitored by the Central Bank of Russia soared from 11.9% last month to 12.4%.

Bloomberg Economics Research's Russian economist, Alex Isakov, stated that the Central Bank of Russia's decision to forgo an interest rate hike in June, "implies a larger increase in July."

The Central Bank of Russia also stated that in order to bring inflation down to the target level, monetary conditions need to be tightened in the second half of the year.

This opens the door for the bank to further raise interest rates in the future.Senior analyst at Moscow First Asset Management, Natalya Vashchelyuk, noted:

"In addition to raising interest rates by 200 basis points, it is highly likely that the regulatory authorities will report at the meeting that the duration of high interest rates will be longer than expected, and the possibility of further rate hikes cannot be ruled out."

With the increase in interest rate levels and the recovery of refinery capacity, it is expected that the trend of soaring inflation in Russia will improve, although risks still exist.

Alex Isakov stated:

"Despite the central bank's recent clear commitment to restoring the inflation rate to the target level within the year, it has become inevitable for the inflation rate to exceed 4% in 2024."