The central bank left interest rates at the highest in almost two decades following an emergency hike, a sign it won’t rush to dismantle economic defenses in the face of unprecedented sanctions over the invasion of Ukraine.

The decision on Friday leaves the benchmark at 20%, in line with the forecasts of the majority of economists in a Bloomberg survey. The ruble reversed gains after the decision and traded 0.4% weaker against the dollar at 1:36 pm in Moscow. Governor Elvira Nabiullina put off her statement on the decision until 5 pm local time.

“The Russian economy is entering the phase of a large-scale structural transformation, which will be accompanied by a temporary but inevitable period of increased inflation,” policy makers said in a statement, warning output will contract over the coming quarters.

The war and its fallout have inflicted a domestic toll that’s already comparable to the worst downturns of President Vladimir Putin’s more than two decades in power.

Capital controls, a shuttered stock market and the seizing up of trade are meanwhile taking the spotlight off rates as the go-to tool for restoring calm in Russia. But with inflation near levels unseen since the government’s debt default in 1998, policy makers need to keep borrowing costs elevated to maintain the confidence of depositors and avoid a run on the banks.

Hours before the central bank’s first regular review of rates since the invasion of Ukraine, Putin proposed a third term for Nabiullina, a veteran of multiple crises who’s been in the job since 2013.

But her policies, focused on inflation targeting and amassing foreign reserves, have fallen short in the face of sanctions that jolted the economy and the ruble, leading to the seizure of as much as two-thirds of the central bank’s $ 643 billion holdings.

The Bank of Russia has responded by restricting foreign exchange transactions and more than doubling its key rate.

Costly response

While the measures have stabilized markets and lured cash back into the banking system, they threaten further hardship for an economy already upended by food shortages and the exodus of foreign companies. Putin said this week that the nation had survived “the economic blitzkrieg” but warned of rising joblessness and faster inflation to come.

The Bank of Russia’s statement on Friday did not include revisions to its forecasts for inflation and the economy after the invasion, but annual price growth reached an estimated 12.54% as of March 11, from just above 9% at end-February. Some economists expect it could soar to 20% in a matter of weeks.

© 2022 Bloomberg

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