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

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

The Russian consumer price index continues to rise despite repeated interest rate hikes by the central bank to curb the rapid rise in prices. The consumer price index reached 8.9% in November compared to the same month last year, up from 8.5% in October, mainly due to rising food prices.

A weaker ruble – after new US sanctions in November – has also fueled inflationdriving up import costs to Russia, a country whose economy was hit hard after the 2022 invasion of Ukraine.

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

“The renewed acceleration of Russian inflation to 8.9% year-on-year in November and the likelihood of further increases in the coming months strongly argue for another large interest rate hike by the central bank,” Liam Peach, senior emerging markets economist at Capital Economics, said in a note last week.

Prices are expected to continue rising, he added, with inflation expected to rise “well above” 9.0% year-on-year by the end of 2025.

“With corporate price expectations also having recently reached new highs, there is a clear argument that the central bank is losing the battle against inflation and will be forced to raise interest rates sharply again… A 200 basis point hike is the base case scenario.” “In our opinion, there are arguments in favor of a larger increase,” said Peach.

The central bank decided to raise interest rates by 200 basis points at its last meeting in Octoberand warned that inflation was “significantly above” its summer forecast and that inflation expectations continued to rise.

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

Russian consumers are particularly affected, as can be seen in staple foods such as butter, eggs, sunflower oil and vegetables Price increases in the high double-digit range because demand exceeds supply.

Russia’s war against Ukraine has also led to labor and supply shortages that have driven up labor and production costs – and these costs have ultimately been passed on to consumers. However, the government blames the high cost of living on sanctions imposed on Russia by “unfriendly” countries. For his part, Russian President Vladimir Putin has denied exchanging “butter for weapons.”

The International Monetary Fund forecasts Russia will see growth of 3.6% in 2024 before slowing next year, forecasting growth of 1.3%. The “sharp slowdown,” the IMF said, is due to “private consumption and investment slowing amid tighter labor markets and slower wage growth.”

The Russian ruble fell sharply against the dollar in November. weakens to 114 against the greenback – the lowest level since March 2022 – after another round of US sanctions targeted Russia’s third-largest bank Gazprombank. The measures are aimed at preventing the bank – which the U.S. Treasury Department says acts as an intermediary for Russia’s purchase of military materials and payment of Russian soldiers – from processing energy-related transactions involving the U.S. financial system.

The sharp fall in the ruble prompted the central bank to intervene with the CBR to support the currency proverb It would halt foreign purchases in the domestic foreign exchange market for the rest of the year “to reduce volatility in financial markets.”

Putin commented on the situation last month and stressed that the situation was under control.

“There is absolutely no reason to panic,” Putin told reporters. This was reported by the RIA Novosti news agency.

“As for the fluctuations in the ruble exchange rate, they are related not only to inflation processes, but also to payments to the budget, they are related to oil prices. There are many factors of seasonal nature,” he added. in Google translated comments.

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

According to analysts Alexandra Prokopenko and Alexander Kolyandr, Russia’s central bank can do little to combat inflation – and the decline of the ruble – as long as the war continues.

“The fundamental reasons for the ruble’s weakness have not gone away, and the dynamics of Russian trade flows mean the currency will falter and inflation will rise,” he said. they noted in an analysis for Carnegiepolitika.

“As the Russian economy slows despite significant government spending, the dynamics of the ruble exchange rate suggest that the country is heading towards stagflation (a toxic combination of slow growth and rising prices),” they said.

“The main 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 they are even afraid to speak about it publicly.”