The Russian central bank is “losing the fight” against inflation

Russia’s central bank is expected to make a dramatic rate hike this week as inflation continues to soar in the war-torn economy.

Russia’s consumer price index continues to rise despite repeated rate hikes by the central bank designed to combat rising prices. The consumer price index was 8.9% in November, compared to the same month of the previous year, which was 8.5% in October, mainly driven by the increase in food prices..

A weaker ruble — following new US sanctions in November — has also fueled inflationBy raising the cost of imports to Russia, whose economy has been hit hard after the invasion of Ukraine in 2022.

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

“The renewed acceleration in Russian inflation to 8.9% year-on-year in November, and the likelihood of further increases in the coming months, argue strongly for another big interest rate hike by the central bank,” Liam Peach, Senior Emerging Markets. Capital Economics economists said in a statement last week.

He added that prices will continue to rise, with inflation likely to rise “well above” 9.0% year-on-year by the end of 2025.

“With business price expectations also reaching new highs, there is a clear argument that the central bank is losing the fight against inflation and will be forced to raise rates sharply again… a 200 basis point rate hike is the base case in our view, but for a bigger hike there are arguments in favor,” said Peach.

central bank It set a rate hike of 200 basis points at its last meeting in Octoberwarning that inflation was running “significantly above” the summer forecast and that inflation expectations continue to rise.

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

Russian consumers have been particularly hard hit as they have seen staples such as butter, eggs, sunflower oil and vegetables. large double-digit price increases because demand exceeds supply.

Russia’s war on Ukraine has also caused labor and supply shortages, which have raised wages and production costs, which have ultimately been passed on to consumers. The government, however, blames the high cost of living on sanctions imposed on Russia by “friendly” countries. For his part, Russian President Vladimir Putin has denied exchanging “butter for arms”.

The International Monetary Fund predicts that Russia will grow by 3.6% in 2024 before a slowdown next year, when growth is expected to be 1.3%. “Hard slowdown”, according to the IMF, “because private consumption and investment have slowed amid a tight labor market and slower wage growth”.

The Russian ruble fell against the dollar in November, Weakening to 114 against the greenback —its lowest level since March 2022—after another round of US sanctions targeted Gazprombank, Russia’s third-largest bank. The measures are intended to prevent the bank – which the US Treasury says acts as a conduit for Russia to buy military equipment and pay Russian soldiers – from handling any energy-related transactions involving the US financial system.

The ruble’s sharp downward move prompted the central bank to step in to prop up the currency, with the CBR. saying it would stop external purchases in the foreign exchange market for the rest of the year, “to reduce the volatility of financial markets”.

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

“There is no reason to panic,” Putin told reporters. RIA Novosti news agency reported.

“As for the fluctuations in the exchange rate of the ruble, this is not only related to inflationary processes, but also to budget payments, it is related to oil prices. There are many seasonal factors,” he added. In comments translated by Google.

The ruble has strengthened in recent weeks, but has fallen about 3% against the dollar in the past month. The last trade was at 103 on Monday against the greenback.

While the war continues, Russia’s central bank can do little to combat inflation — and the ruble’s deterioration — according to analysts Alexandra Prokopenko and Alexander Kolyandr.

“The root causes of the ruble’s weakness have not gone away, and the dynamics of Russia’s trade flows mean a weaker currency and higher inflation.” they stated in the Carnegie Policy Review.

“Despite significant state spending as the Russian economy slows, the ruble’s exchange rate dynamics suggest the country is heading for stagflation (a toxic combination of slow growth and rising prices),” they said.

“The root cause is the war and the resulting Western sanctions and the militarization of the Russian economy. The country’s financial authorities do not have the power to solve this problem, and are even afraid to talk about it publicly.”