Russia Economic: Rising inflation forces interest rate hike
Published 14 November 2014
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Summary
Russia raises interest rates 1.5 percentage points to 9.5% to combat accelerating inflation. The announcement does not stop the rouble’s fall against the dollar, despite a rally the previous day. Central bank attributes weakening rouble to drop in oil price and sanctions against large Russian companies. Central Bank predicts near zero growth in coming 6 months.
Detail
Russia’s Central Bank has increased its key rate by 1.5 percentage points to 9.5%; a 4.0 percentage point rise since March this year. In a statement accompanying the announcement, the Central Bank explained that consumer price growth had accelerated in recent months as a result of the ban on certain Western food products and the falling rouble. At the end of October, the Bank estimated that annual consumer price growth was running at 8.4%, significantly above its 4% target. The 11.4% annual rise in food prices in September contributed significantly to the overall inflation figures: non food inflation was 5.5% . The Central Bank estimated that the falling rouble and the embargo on food products would contribute 2.5 percentage points to the final inflation figures at the end of 2014. Its official assessment was that inflation would remain high until at least next Spring.
The rouble fell again against the dollar on Fri 31 October, despite having strengthened the day before. Markets are closed 3 and 4 November for Russian public holidays. The Central Bank attributed the fall in the rouble over recent months to ‘a considerable fall in oil prices and stricter sanctions imposed by certain countries against several large Russian companies’. Some analysts link the 30 October rally to the rumours circulating that the Central Bank would announce an immediate shift to a free float exchange rate after its Friday meeting. Others point to one particularly large, $3bn trade. One leading ING’s chief economist commented that it would take months if not years to see a sustained rouble recovery, and only then if the oil price recovered and access to international finance was reopened.
The Central Bank’s prognosis for economic growth was also gloomy. With current estimates for third quarter growth of 0.2%, the Bank forecast that economic growth in the final quarter of 2014 and the first 2015 would be ‘close to zero’. Some analysts hoped that the fall in rouble would boost exports, providing some economic stimulus. But Citigroup research showed the Russian economy lacked the spare capacity to be able to boost production, and therefore would not be able to take full advantage of the weaker currency.
Comment
The 1.5 percentage point increase was higher than most analysts expected, showing the degree of concern about inflationary pressures. A recent Levada Centre poll showed that inflation was the country’s greatest societal concern, with 71% of those surveyed saying that it worried them. Well above the 11% that were worried about the rise of nationalism and worsening international relations. Ordinary Russians defiantly and patriotically profess not to care about the ban on foreign food products and sanctions generally. But it remains to be seen whether their stoicism, which runs deep in Russia, will insulate the Government from political pressure and criticism in the longer term.
Disclaimer
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