Russia’s central bank to aggressively raise interest rates to battle inflation

Several economists, including Liam Peach, a senior emerging market economist in Capital Economics, expect the Central Bank of Russia to initiate major interest rate hikes on December 20. The speculations are despite the CBR’s Governor, Elvira Nabiullina, mentioning last week that a rate hike was not predetermined in the upcoming rate-setting meeting. 

Russia’s inflation has continued to rise despite rate hikes to reduce consumer prices during the war with Ukraine. The November inflation report indicated that the consumer price index had risen to 8.9% in November, compared to the 8.5% recorded in October. The rising index was mostly attributed to hiking food prices in Russia.

The CBR raised interest rates by 200 basis points in October, bringing borrowing rates to 21% annually. The central bank reported on October 25 that the inflation rate was rising beyond the bank’s July forecast. The report further indicated the continued rise in other metrics, including seasonally adjusted price growth and core inflation. The central bank forecasted an inflation range between 8.0% and 8.5% by the end of the year. 

Another report confirmed that Russian consumers have experienced a double-digit increase in the price of basic foodstuffs over the past few months. The report highlighted the increasing consumer demand during the war, putting a strain on the country’s supply of goods. Russia has also been experiencing labor shortages and increased production costs. The country has received several sanctions from different countries since 2022, weakening its economic relations. 

The CBR expected to raise interest rates by 200 basis points

A recent Reuters poll indicated that the CBR might raise the interest rate by another 200 basis points on December 20, bringing the borrowing rates to 23% per annum. Some economists in the poll suggested an increase in the borrowing rate to 22%, while others expected a higher rate hike to 25%. 

Chief economist at Sovkombank Mikhail Vasilyev commented that a 200-basis-point rate hike should be expected, and other indicators point to more hikes in future meetings. The economist Liam Peach agreed to the possibility of a 200-basis-point hike as the base case and speculated that a higher rate hike was also possible. 

According to Peach, the acceleration in inflation favored another large interest rate hike from the Russian central bank. The economist further highlighted that firms had a growing price expectation. Peach explained that the expectations indicated the CBR’s losing battle with rising inflation. The economist also highlighted that the current conditions would force the bank to hike interest rates massively. 

The Russian ruble continues to weaken

The Russian ruble has been getting weaker amid the growing inflation crisis, with the currency weakening to 114 against the U.S. dollar in November. The ruble has declined to reach 104 against the dollar since then.

A University of California San Diego professor, Branislav Slantchev, explained that the currency is at its weakest since the collapse of the USSR. 

The CBR announced on November 27 that it would stop purchasing foreign currency in the domestic foreign exchange market to reduce the Russian economy.

Moscow leader Vladimir Putin also insisted that the ongoing panic due to the currency’s plunge is unnecessary. Putin explained that the ruble’s fluctuations resulted from ongoing inflation, oil prices, payments to the budget, and more.

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