The Bank of Russia's Board of Directors has raised the key interest rate to 18% per annum, marking the highest rate since April 2022. The decision, announced on July 26, reflects the central bank's response to mounting inflationary pressures and is part of its strategy to stabilize the economy.
Inflation Surges Above Forecasts
In recent months, inflation in Russia has notably outpaced earlier forecasts. By the end of June, the annual rate of price growth had surged to 8.6%, up from 5.8% in the previous quarter. This upward trend continued, with inflation reaching 9% by July 22, driven in part by increased housing and communal services tariffs.
Core inflation, which excludes volatile items and is adjusted for seasonality, rose from 6.8% to 9.2% between April and June. These rising inflation figures have heightened concerns among both the public and financial market representatives, contributing to increased expectations of ongoing price growth.
Monetary Policy Adjustments
To counteract these inflationary trends, the Central Bank of the Russian Federation has forecasted an inflation rate of 6.5-7% by the end of the year. Experts anticipate that a tight monetary policy will help reduce inflation to 4-4.5% by next year.
The central bank's latest rate hike follows a series of increases in the second half of 2023, culminating in a rate of 16% in December. This aggressive monetary tightening aims to curb inflationary pressures by discouraging borrowing and spending, thereby slowing the pace of price increases.
Russia is currently experiencing high consumer activity fueled by growing household incomes and significant investment demand, partially driven by corporate profits. However, the economy also faces a growing labor shortage, which is leading to higher business costs and adding to inflationary pressures.
The central bank has identified several pro-inflationary factors that dominate the balance of risks. These include changes in the terms of foreign trade resulting from geopolitical tensions and continued high inflation expectations. Additionally, the economy's deviation from a balanced growth trajectory poses a significant risk.
One of the main disinflationary risks identified by the Bank of Russia is a sharp decline in domestic demand. Should consumer spending and investment decrease markedly, it could help ease inflationary pressures but also slow economic growth.
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