A customer with a cart selects cheese at the Okey supermarket in St. Petersburg.
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The Russian central bank is expected to raise interest rates significantly later this week as inflation continues to rise in the war-focused economy.
Russia's consumer price index continues to rise despite repeated interest rate hikes by the central bank aimed at taming rampant price hikes. The CPI was 8.9% in November compared to the same month a year earlier, compared to 8.5% in October, mainly driven by higher food prices..
The weak ruble – in the wake of new US sanctions in November – also fueled inflationThis led to a rise in the cost of imports to Russia, a country whose economy was severely damaged after its invasion of Ukraine in 2022.
Economists now expect the Russian central bank to raise interest rates by 200 basis points at its meeting on December 20 – raising the country's key interest rate to 23%.
“The renewed acceleration of Russian inflation to 8.9% year-on-year in November, and the prospect of further increases in the coming months, strongly supports another major interest rate hike from the central bank,” said Liam Beach, senior emerging markets economist. the economist at Capital Economics said in a note last week.
He added that prices are set to continue to rise, with inflation likely to rise “well above” 9.0% year-on-year by the end of 2025.
“With corporate price expectations also rising to new highs recently, there is a clear argument that the central bank is losing the battle against inflation and that it will be forced to raise interest rates sharply again… A 200 basis point rate hike is the base case in our view.” “But there are arguments in favor of a larger increase.”
The price rises
Central Bank The bank approved an interest rate increase of 200 basis points at its last meeting in OctoberHe warned that inflation was “much higher” than his forecast for the summer and that inflation expectations continue to increase.
The Russian Central Bank said that “the growth in domestic demand significantly exceeds the capabilities needed to expand the supply of goods and services.” In a statement.
Russian consumers have been particularly hard hit as the prices of basic foodstuffs, such as butter, eggs, sunflower oil and vegetables, have risen. Significant double-digit price increases As demand exceeds supply.
Russia's war against Ukraine also caused labor and supply shortages, which drove up wage and production costs – and these costs were ultimately passed on to consumers. But the government blames the high cost of living on sanctions imposed on Russia by “unfriendly” countries. For his part, Russian President Vladimir Putin denied exchanging “butter for guns.”
The International Monetary Fund expects Russia to register growth of 3.6% in 2024 before slowing down next year, when growth of 1.3% is expected. “A sharp slowdown is envisaged as private consumption and investment slow amid easing labor market distress and slower wage growth,” the IMF said.
Customers shop for milk and dairy products inside the Auchan Retail International hypermarket in Moscow, Russia.
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Weak ruble
While Russia has sought to evade the pain of sanctions through import substitution and exporting oil and gas to countries willing to accept them, international sanctions are painful.
The Russian ruble fell sharply against the dollar in November. Weakens to 114 against the dollar – its lowest level since March 2022 – after another round of US sanctions targeting Russia's third-largest bank, Gazprombank. The measures are intended to prevent the bank – which the US Treasury Department said acts as a conduit for Russia to purchase military materials and pay the salaries of Russian soldiers – from handling any energy-related transactions related to the US financial system.
Russian conscripts called up for military service sit on a bus before leaving for garrisons, in Bataysk in the Rostov region, Russia, November 16, 2024.
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The ruble's sharp move lower prompted the central bank to intervene to support the currency, with the Central Bank of Russia Saying Foreign purchases in the local currency market will be halted for the rest of the year “in order to reduce financial market volatility.”
Putin commented on the situation last month, stressing that the situation was under control.
“There is absolutely no reason to panic,” Putin told reporters. This was reported by RIA Novosti news agency.
US dollar/Russian ruble spot exchange rate
He added: “As for fluctuations in the ruble exchange rate, this is not only related to inflationary processes, but also to budget payments, and to oil prices. There are many factors of a seasonal nature.” In the comments translated by Google.
The ruble has risen in recent weeks, but remains down by about 3% against the dollar over the past month. It was last trading at 103 to the dollar on Monday.
There is little the Russian central bank can do to address inflation — and the ruble's decline — while the war continues, according to analysts Alexandra Prokopenko and Alexander Kolyander.
“The fundamental reasons for the ruble’s weakness have not faded away, and the dynamism of Russian trade flows means that the currency is destined to falter and inflation to rise.” They noted in an analysis by Carnegie Politica.
“With the Russian economy slowing despite heavy government spending, the dynamics of the ruble exchange rate suggest that the country is heading toward stagflation (a toxic combination of slow growth and high prices),” they said.
“The root cause is the war, the ensuing Western sanctions and the militarization of the Russian economy. The country’s financial authorities do not have the capacity to solve this problem – they are even afraid to talk about it openly.”
