Russia raises interest rates by 1 percentage point to combat continued inflation

Russia raises interest rates by 1 percentage point to combat continued inflation


Russia’s economic dynamics

The Central Bank of Russia has raised key lending rates by 1 percentage point, the largest increase in more than six years, and the fourth consecutive tightening of policies to curb inflation.

The central bank said on Friday that it will raise the main lending rate to 6.5%. Since March The rate increased by 2.25 percentage points.

Nonetheless, rising prices of major household goods have pushed inflation to levels not seen in nearly five years, putting pressure on Russia’s wallets and annoying the Kremlin, which is preparing for parliamentary elections in September.

The bank said last week that the annual inflation rate in June was 6.5%, the highest level since August 2016 and higher than the 6% in May.

Despite the government’s efforts to freeze the costs of key commodities, the economic recovery brought about by the domestic pandemic lockdown is faster than expected, the surge in global commodity markets and the weak ruble have all contributed to price increases.

In a statement after the announcement of the interest rate decision, the central bank stated: “Inflation is developing and is higher than the forecast of the Central Bank of Russia… This largely reflects that the steady growth of domestic demand has exceeded the capacity for expansion in many areas. In this case, companies find it easier to transfer higher costs to prices.”

Despite this move, the central bank expects that the pace of inflation will continue to accelerate and warns that it may take further action as a result. “If the situation develops in line with the baseline forecast, the Bank of Russia will consider the need for further interest rate hikes at its upcoming meeting,” it said.

In a country where the memory of hyperinflation and rationing was only a generation ago, food prices are a sharp political issue facing the administration of President Vladimir Putin. In the past seven years, real household income has fallen for five years, and 20 million people (one in seven) live below the poverty line.

In order to protect poor citizens from rising global commodity prices, Moscow has imposed price caps on some staple food products and is considering imposing new export quotas or additional tariffs on other commodities. According to reports, some Russian bakers said this week that they will increase prices by about 10% to offset higher costs and their claimed insufficient state subsidies.

“Inflation is the only goal [central bank] The conservative approach was well tested before the crisis. It is easier to raise interest rates than not to raise interest rates. [bank] Now, if you are hesitant about the factors behind price growth and the ongoing balance of inflation,” Sofya Donets, a Russian economist at Renaissance Capital, wrote in a report to clients this week.

The Central Bank of Russia stated that Russia’s economic output returned to pre-pandemic levels in the second quarter of this year and expects to continue to expand in the second half of this year.

“high frequency [data] The indicators indicate steady growth in consumer and investment demand,” it said. “Consumer activity has exceeded pre-pandemic levels. “

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