Russia’s central bank is ‘losing the battle’ against inflation

Russia’s central bank is expected to implement a major interest rate hike later this week as inflation continues to soar in the war-centered economy.

Russia’s consumer price index continues to rise despite the central bank’s repeated interest rate hikes to curb rampant price increases. The consumer price index in November reached 8.9% year-on-year, up from 8.5% in October, mainly due to higher food prices.

The ruble’s depreciation following new U.S. sanctions in November is also accelerating inflation and raising the cost of imports to Russia, whose economy was hit hard by the 2022 invasion of Ukraine.

Economists now expect Russia’s central bank, the CBR, to raise interest rates by 200 basis points at its Dec. 20 meeting, taking the country’s key interest rate to 23%.

“Russia’s inflation rate accelerated again in November to 8.9% year-on-year, and is likely to rise further in the coming months, giving us strong support for another major interest rate hike by the central bank.” said Liam Peach, senior market manager. Economists at Capital Economics said in a note last week.

He added that price increases are expected to continue, with inflation likely to be “well above” 9.0% year-on-year by the end of 2025.

“Business price expectations have also hit new highs recently, and there is a clear argument that central banks will lose the fight against inflation and be forced to raise rates significantly again…200 basis points is the base case. “That’s our view, but there are arguments in favor of a larger increase,” Peach said.

The central bank decided to raise interest rates by 200 basis points (bp) at its last meeting in October, warning that inflation was running “significantly higher” than expected in the summer and that inflation expectations remained elevated.

“Growth in domestic demand is significantly outpacing the ability to expand the supply of goods and services,” CBR said in a statement.

Russian consumers have been particularly hard hit, with basic food items such as butter, eggs, sunflower oil and vegetables seeing price increases in the low double digits as demand outstrips supply.

Russia’s war against Ukraine has also created labor and supply shortages, driving up wages and production costs, which are ultimately passed on to consumers. But the government blames the soaring cost of living on sanctions imposed on Russia by “unfriendly” countries. Meanwhile, Russian President Vladimir Putin denied having traded “butter for guns”.

The International Monetary Fund predicts that Russia will register 3.6% growth in 2024, with growth expected to slow next year to 1.3%. The IMF stated that the “sharp economic slowdown” is expected to result from “a slowdown in personal consumption and investment due to easing of labor market tensions and a slowdown in the rate of wage growth.”

International sanctions are hurting Russia, which has tried to avoid the pain of sanctions through import substitution and exporting oil and gas to host countries.

The Russian ruble plummeted against the dollar in November, falling to 114 rubles against the dollar (its lowest level since March 2022) following additional US sanctions targeting Gazprombank, Russia’s third-largest bank. The measure would prevent the bank, which the U.S. Treasury says is a conduit for Russia to buy military supplies and pay Russian soldiers, from handling energy-related transactions that touch the U.S. financial system. The purpose is

The rapid depreciation of the ruble prompted the central bank to intervene to support the ruble, with the CBR announcing that it would suspend foreign purchases in the domestic currency market for the rest of the year “to reduce volatility in financial markets.”

President Putin commented on the situation last month, insisting that the situation was under control.

“There is absolutely no basis for panic,” President Putin told reporters, news agency RIA Novosti reported.

“As for fluctuations in the ruble exchange rate, this is related not only to the inflation process, but also to budget payments and oil prices. There are many seasonal factors,” he added. Comment translated by Google.

The ruble has strengthened in recent weeks, but remains down about 3% against the dollar over the past month. It last traded at $103 against the dollar on Monday.

Analysts Alexandra Prokopenko and Alexander Kolyandr say there is little Russia’s central bank can do to combat inflation and the ruble’s decline as the war continues.

“The fundamental reasons for the ruble’s weakness are not going anywhere; the dynamics of Russia’s trade flows mean that the currency is destined for weakness and inflation to rise,” they wrote in an analysis by Carnegie Politica. pointed out.

“As Russia’s economy slows despite high state spending, developments in the ruble exchange rate suggest the country is heading towards stagflation, a toxic combination of low growth and rising prices,” they wrote. said.

“The root cause is the war and the subsequent Western sanctions and militarization of the Russian economy. The country’s financial authorities are powerless to solve this problem and are afraid to even talk about it publicly. ”