Russia’s central bank raised interest rates for the fifth time in a row on Friday, and indicated it might hike further to curb surging prices and food costs that are pushing up inflation in many emerging markets.
The Bank of Russia raised its key interest rate by 25 basis points to 6.75 per cent, addressing what has become a major issue ahead of parliamentary elections later this month that are marked by soaring food prices and slumping real incomes.
Although Russia’s central bank is among the emerging world’s most hawkish, the rate rise — which followed a 100 basis points hike in July, the largest since the country’s 2014 financial crisis — was less than predicted by economists, who in surveys expected a 50 basis point increase.
Inflation is running at a five-year high of 6.74 per cent, the central bank reported this week, well above the country’s 4 per cent target. A similar pattern is true across many other emerging markets, especially Latin America.
“The Bank of Russia doesn’t rule out a possibility of a further rate hike at its next meetings,” central bank governor Elvira Nabiullina told a press conference. “In order to return to 4 per cent inflation, more than one hike could be needed. In that sense, the signal has become more hawkish.”
Nabiullina added that rising inflation meant any talk of cutting rates was “completely premature . . . we might hike more than once.”
Russia’s economy returned to pre-pandemic levels in the second quarter of this year, which the central bank said had had a “significant impact” on inflation as demand began to outstrip supplies.
“When there’s not enough manpower or component parts, stimulating demand through fiscal policy can’t increase output or consumption,” she said. “If demand for cars goes up more, that won’t mean there’ll be more of them . . . it’ll just increase the lines for them and speed up the pace of price rises.”
Christine Lagarde, head of the European central bank, also cautioned on Thursday that supply chain issues could affect inflation in the eurozone.
Alexander Kudrin, senior strategist at Russian investment bank Aton, said Nabiullina’s decision left the Russian central bank’s future steps unclear. “The market was mostly counting on softer rhetoric, and that didn’t happen,” he said in a note. Nabuillina “turned rather hawkish” at the press conference, added Natalia Orlova, chief economist at Alfa-Bank.
Nabiullina, who told the Financial Times in July she was considering lowering the central bank’s 4 per cent inflation target, has been one of the most prominent central bankers to warn of inflationary risks as the global economy emerges from its pandemic slump.
Last week, the bank even suggested that spiralling inflation could lead to a global crash akin to the 2008 financial crisis, as higher interest rates prompted investors to dump risky assets, particularly those of emerging markets with high levels of foreign-denominated debt.
The central bank said it considered the scenario unlikely and predicted that inflation would begin to slow in the fourth quarter of this year, before returning to its 4 per cent target in 2022.
Source: Economy - ft.com
