CBR reiterates hawkish stance as Russia’s inflation hits 6%

CBR reiterates hawkish stance as Russia’s inflation hits 6%
Russian inflation has been steadily rising of late. / bne IntelliNews
By bne IntelliNews October 12, 2023

Annual inflation in Russia amounted to 5.9% as of October 2, coming close to breaching the full-year target of the Central Bank of Russia (CBR) of 6%-7% (chart), Tass reported citing the address of the CBR’s Deputy Governor Alexey Zabotkin to the State Duma.

bne IntelliNews covered in detail how inflation has accelerated further this autumn after some Russian regions were hit with fuel shortages, with senior Kremlin figures calling for a ban on the export of petroleum to prevent petrol stations across Russia from running dry.

The petroleum crisis could notably worsen the inflation outlook in Russia, which has already suffered from ruble devaluation and an overheating economy. The Central Bank of Russia (CBR) at the September 15 policy meeting resolved to increase the key rate from 12% to 13%, following the emergency hike by 350 basis points in August amid the ruble weakening(chart)

The analyst and economist reaction compiled by The Bell note that weekly inflation dynamics at the end of September are much worse than expected, supporting the tough monetary policy stance recently reiterated by the CBR.

Indeed, Zabotkin reiterated that “for returning inflation to the 4% target in 2024 it will be necessary to maintain stringent monetary policy during the next year”, adding that the CBR “does not rule out that additional toughness will also be required, apart from decisions that have already been taken" as cited by CBR.

“We think the tightening cycle will continue for a while longer, including with another 100bp interest rate hike later this month,” Capital Economics commented, reminding that 0.9% month on month spike in inflation in September was the largest monthly rise since April 2022 and the largest increase in the month of September in more than two decades.

According to the CBR’s guidance provided in September, the key rate is expected at 11.5-12.5% in 2024, up from 8.5%-9.5% in the previous forecast, and it it possible that the interest rate will be further raised should inflation fail to curb to 6%-7% full-year target.

In 2025, the regulator currently predicts it to be 7-8% (up from 6.5-8.5% projected earlier). The forecast for 2026 remains unchanged at 5.5-6.5%.

In September, services inflation edged up from 9.5% y/y to 9.6% and non-food goods inflation rose from 3.6% y/y to 4.6%. “This largely reflects the impact of very strong domestic demand and the sharp fall in the ruble in recent months feeding through into prices. Food inflation also came in pretty strong too, rising from 3.6% y/y to 4.9%,” Capital Economics commented.

Capital Economics analysts believe that “Russia’s economy is overheating and inflation is likely to exceed the central bank’s end-year forecast of 6.0%-7.0% by a fair margin,” estimating that inflation will rise above 8.0% y/y in 1Q23 causing further key interest hikes.