The Russian central bank has raised its key interest rate again – for the fifth time since the summer. For months, monetary authorities have been trying to combat high inflation and prevent another ruble collapse.
Russia’s central bank raised the key interest rate again before the turn of the year and, according to its own statements, is nearing the end of the tightening phase. “Current inflation pressures remain high,” the central bank said today. Therefore, it raised the key monetary policy rate by a full percentage point to 16.0 percent. Experts interviewed by Reuters had expected the fifth increase in a row.
Inflation at 7.5 percent
Based on a base scenario, the interest rate hike cycle is nearing the end, said central bank chief Elwira Nabiullina. “But in many ways it will all depend on the situation.” At the same time, bankers signaled that, given the ongoing risks of inflation, a tight monetary policy line would be necessary for a long time to come.
“The risks of inflation remain significant in the medium term,” the central bank warned. It is expected that “annual inflation in 2023 will be near the upper limit of the forecast range of 7.0 to 7.5 percent.”
Since July, the monetary authorities had raised the key interest rate by 8.5 percentage points. This is intended to combat high inflation. The inflation rate climbed to 7.5 percent in November – against a target value of four percent.
“Inflationary pressure continues to increase”
Meanwhile, experts disagree about what will happen next in Russia’s monetary policy. “We still expect further tightening to occur as inflation pressures continue to rise,” said economist Liam Peach at consultancy Capital Economics. He expects the key interest rate to rise further to 17 percent next year.
Anatoliy Shal from JP Morgan, on the other hand, believes that the tightening phase has already been completed. The current monetary policy is sufficient, if not excessively restrictive. The expert assumes that the key rate will be reduced to around ten percent by the end of 2024.
The Moscow monetary authorities had tried to mitigate the economic effects of the war in Ukraine and Western sanctions against Russia with a flexible interest rate policy. The fall in the ruble forced the central bank to drastically increase interest rates in a crisis meeting in August.
High military spending could further fuel inflation
Russian President Vladimir Putin, who recently announced his re-candidacy for the March 2024 election, praised his country’s economic development at his annual press conference yesterday. In fact, the indicators point to a major imbalance within the Russian economy.
Sectors such as manufacturing, construction and agriculture are suffering from labor shortages – an impact of the mobilization of hundreds of thousands of reservists to fight in Ukraine. In addition, many skilled workers have gone abroad to avoid being drafted into the army. This shortage forces companies to offer higher wages to recruit workers.
The Russian government recently announced that it would increase defense spending by 70 percent in 2024. This could also contribute to a further price increase.