Russia raises interest rates: a little more inflation is expected
The Bank of Russia raised its key interest rate by 200 bps to 18% in its July 2024 decision, in line with signals from the June meeting and financial market expectations, and said it would take into account consider further rate increases if they are necessary to control inflation.
The hike marked the resumption of the central bank's tightening cycle, after holding the previous terminal rate of 16% since December 2023. The CBR noted that domestic demand continues to outpace the limited supply capacity that the Russian economy has able to deliver, triggering aggressive inflationary pressures and justifying increased borrowing costs.
In addition to pressure on supply capacity due to Western sanctions, the CBR also noted that labor shortages continue to grow amid the fallout from President Putin's military mobilization and resulting diaspora of working-age men. The central bank now expects inflation to end 2024 in the 6.5%-7% range, before falling towards the 4% range in the latter part of 2025.
So Russia has an inflation problem linked to an excess of demand over supply because, in the end, the Russians are much better off than we thought, they consume, and therefore tend to raise inflation.
The regulator reported that core inflation in the second quarter of 2024 rose to an average of 9.2% annualized. The annual rate also increased: in June it went from 8.6% to 9.0%, according to estimates from July 22.
The Central Bank's medium-term forecasts assume that average annual inflation in 2025 will be 4.2–5.8%, while in 2026 and 2027 it will fall to 4%. A comment on the forecast will be published on August 7.
The central bank therefore must cool the economy, and it does so in the simplest way possible, that is, by raising rates. This will also have another effect: the Ruble will become more attractive and will tend to strengthen, making imports more convenient.
We know that there are sanctions, but, at the same time, the borders are not an iron wall, but a sort of sieve, with many holes through which products can pass. The stronger ruble will attract more imports, including "grey" ones, and this will better satisfy the always considerable consumption of Russians. ù
Because, as we will write later, the Russians are much better off than you think.
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The article Russia raises interest rates: expect a little more inflation comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/la-russia-rialza-i-tassi-dinteresse-si-attendono-un-po-piu-di-inflazione/ on Fri, 26 Jul 2024 16:13:43 +0000.