In an emergency 15 August rate meeting, officials of Russia’s central bank hiked a key interest rate by 3.5 percentage points to 12.0 percent.
“Inflationary pressure is building up,” the bank said in a statement on Tuesday. “The pass-through of the ruble’s depreciation to prices is gaining momentum and inflation expectations are on the rise.”
Inflation has risen past the bank’s 4-percent target rate and ran at an average of 7.6 percent through May, June, and July and is accelerating.
“In the case of strengthening pro-inflationary risks, an additional increase in the key rate is possible,” the bank warned.
The surprise move was intended to stop the value of the ruble from falling further after Maxim Oreshkin, the Kremlin’s chief economic adviser, scolded the bank for a “soft” monetary policy that let the ruble grow weak.
A day earlier, the ruble’s value had passed 100 to the dollar, landing at 102, its lowest since Russia invaded Ukraine in February 2022. The ruble began this year at about 70 to the buck and settled at 90.5 on 22 August.
Western sanctions against Russia’s exports and Russia’s continued lavish military spending to continue its war in Ukraine were to blame, Bloomberg reported.
Russia watchers expect the move to have short-term benefits but little long-term impact, Bloomberg noted.
“As long as the war continues, it just gets worse for Russia, the Russian economy, and the ruble,” Timothy Ash, senior emerging market strategist at Bluebay Asset Management, told Bloomberg.
“Hiking policy rates won’t solve anything,” he added. “They might temporarily slow the pace of depreciation of the ruble at the price of slower real GDP growth unless the core problem – the war and sanctions – are resolved.”
Liam Peach, emerging markets economist at Capital Economics, agreed. “Today’s rate hike will only temporarily slow the bleeding,” he said in a Reuters interview.
“Russia will struggle to attract capital inflows because of sanctions,” he predicted, “and there’s little ammunition for foreign exchange intervention. The central bank has some unfrozen renminbi assets and gold reserves, but the bar for using these is likely to be high.”
TREND FORECAST: The impact of Western sanctions on Russia’s economy will continue to grow as the war continues. At the same time, U.S. public support for continuing to arm Ukraine will continue to wane.
While the ruble is taking a hit, we maintain our forecast that considering the extent of Russia’s human and natural resources, the country will pull more away from globalization and concentrate on self-sufficiency. See:
● “RUSSIA EXPERIENCING MASSIVE TECH ‘BRAIN DRAIN’” (10 May 2022)
● “MORE SANCTIONS ON RUSSIA, MORE GERMAN GAS SHORTAGES” (25 Apr 2023)