Anastasia Gorbacheva16:49, 13.09.24

Most analysts expected the rate to be held amid signs of a cooling economy.

Russia’s central bank continued to tighten monetary policy even after signs began to emerge that the country’s overheated economy might be slowing.

Reuters reports that the Bank of Russia has raised its base rate by 100 basis points to 19% and left open the possibility of another hike at its upcoming meeting in October .

“Current inflationary pressures remain high,” the central bank said in a statement. “Further monetary policy tightening is needed to resume the disinflation process, reduce inflation expectations and ensure that inflation returns to the target level in 2025.”

Policymakers have signaled they are seriously considering another rate hike amid continuing price increases that the central bank is struggling to contain. Although annual inflation slowed slightly in August for the first time this year to 9.05% from 9.13% in July, it remains well above the official target of 4%. Retail demand, fueled by massive government spending, has also begun to ease, a sign that Russia’s economy may be cooling.

In July, Nabiullina warned of the risk of stagflation, or high prices combined with low economic growth, as the country’s war-driven economy appeared to reach its limits.

However, household inflation expectations, a key indicator for the bank, continue to rise, reaching 12.9% last month. Business expectations have also risen, and corporate lending shows no signs of cooling.

“Despite some slowdown, consumer activity remains strong,” the bank said in a statement. “The balance of inflation risks is significantly tilted to the upside.”

The bank also pointed to a “significant labor shortage,” singling out the manufacturing industry.

“The Bank of Russia’s rate hike to 19% will help accelerate the decline in inflation to 4%, even at the cost of a higher risk of recession. The central bank needs to restore its credibility after a series of inflation target failures that lasted until 2020. But this will be a gradual and long-term process, and not something that can be achieved with a single rate hike. Going forward, we expect the Bank of Russia to leave the rate unchanged at its meeting on October 25,” Alexey Isakov, Russia economist.

Russian Economy – Latest News

According to Bloomberg,  Russia’s economy is exhausting its potential . In particular, huge government spending on defense contributed to the growth of the economy during the war. At the same time, the Russian economy, which is suffering from huge expenses for the war against Ukraine, may slow down sharply. 

At the same time, The Economist reported that despite tough sanctions and pariah status,  the Russian economy is growing rapidly . It turns out that frantic spending during wartime really does stimulate the economy. 

(C)UNIAN 2024