A customer pushing a shopping cart selects cheese at Okey supermarket in St. Petersburg.
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Russia’s central bank is expected to raise interest rates sharply later this week as inflation continues to soar in a war-centric economy.
Despite the Russian central bank raising interest rates several times to curb rising prices, Russia’s consumer price index continues to rise. The consumer price index rose 8.9% in November from the same month last year, up from 8.5% in October, mainly driven by rising food prices.
A weaker ruble after the United States imposed new sanctions in November has also fueled inflation, pushing up Russia’s import costs.
Economists currently expect Russia’s central bank, the CBR, to raise interest rates by 200 basis points at its December 20 meeting, taking the country’s key interest rate to 23%.
“Russia’s inflation rate accelerated again in November, rising to 8.9% year-on-year, and may rise further in the coming months, which strongly supports the central bank’s sharp increase in interest rates again,” said Liam Peach, senior analyst for emerging markets. Capital Economics economist said in a report last week.
Prices will continue to rise, with inflation likely to be “well above” 9.0% by the end of 2025 compared with the same period last year, he added.
“With business price expectations also reaching new highs recently, there is an obvious argument that central banks are losing the battle against inflation and will be forced to raise interest rates sharply again… A 200 basis point hike is the base case, in our view, But there are also arguments for a bigger rate hike,” Peach said.
price rise
central bank An interest rate hike of 200 basis points was announced at the last meeting in October.warned that inflation was “well above” summer forecasts and that inflation expectations continued to rise.
“Growth in domestic demand has clearly outstripped the ability to expand the supply of goods and services,” CBR said. in a statement.
Russian consumers have been particularly hard hit, as prices for basic food items such as butter, eggs, sunflower oil and vegetables have seen double-digit increases as demand exceeds supply.
Russia’s war in Ukraine has also created labor and supply shortages, driving up wages and production costs, which are ultimately passed on to consumers. However, the government blames the high cost of living on sanctions imposed on Russia by “unfriendly” countries. Russian President Vladimir Putin denied trading “butter for guns.”
The International Monetary Fund predicts that Russia’s economic growth will reach 3.6% in 2024 and will slow down next year, with growth expected to be 1.3%. The International Monetary Fund said it expected a “sharp slowdown” in the economy “due to easing labor market tightness and slower wage growth, slowing private consumption and investment.”
Customers buy milk and dairy products at the Auchan Retail International hypermarket in Moscow, Russia.
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Weak ruble
While Russia attempts to evade the pain of sanctions through import substitution and exports of oil and gas to countries willing to accept sanctions, international sanctions are taking their toll.
The Russian ruble fell sharply against the U.S. dollar in November. USD/USD fell to 114, its lowest level since March 2022, after the United States imposed a new round of sanctions on Gazprombank, Russia’s third-largest bank. The measures are intended to prevent the bank from processing any energy-related transactions involving the U.S. financial system.
On November 16, 2024, Russian conscripts sat on a bus in Bateysk, Rostov region, Russia, preparing to leave for the garrison.
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Sharp decline in ruble prompts central bank to intervene to support currency, central bank explain It will halt foreign purchases in its currency markets for the remainder of the year “to reduce volatility in financial markets.”
Putin commented on the situation last month, insisting it was under control.
“There is absolutely no reason to panic,” Putin told reporters. RIA Novosti reports.
USD/Russian ruble foreign exchange spot rate
“As for the fluctuations in the ruble exchange rate, this is not only related to the inflation process, but also to budget payments, to oil prices. There are many seasonal factors,” he added in comments on Google Translate.
The ruble has strengthened in recent weeks but is still down around 3% against the dollar over the past month. It last traded at 103 against the US dollar on Monday.
Analysts Alexandra Prokopenko and Alexander Kolyandr said there was little Russia’s central bank could do to address inflation and the depreciation of the ruble while the war continued.
“The underlying reasons for the ruble’s weakness have not gone away, and the dynamics of Russian trade flows mean the ruble is bound to falter and inflation will rise.” they noted in an analysis in Carnegie Politics.
“The Russian economy is slowing despite huge state spending, and dynamics in the ruble exchange rate suggest the country is heading towards stagflation (a toxic combination of slow growth and rising prices),” they said.
“The root cause is the war and the accompanying Western sanctions and the militarization of the Russian economy. The country’s financial authorities have no power to solve this problem – they don’t even dare to talk about it publicly.”
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