Russia battles runaway inflation with high interest rates

Inflation in Russia significantly exceeds the target set by the Central Bank, which is 4 percent. Despite maintaining the main interest rate at a high level of 16 percent, domestic demand still poses a pro-inflationary risk, and bank authorities do not rule out further increases, according to the PIE weekly.

The report's authors note that for almost a year the rate of price growth in Russia has been higher than the inflation target set by the Central Bank at 4 percent. They attribute this to a shortage of workers caused by mass emigration and military conscriptions. Consequently, there is a significant increase in wages, as employers strive to retain highly skilled personnel at any cost. Over the past 12 months, the average wage has increased by 17.1 percent, which is also notable in real terms.

The report states that the Central Bank of Russia is fighting rising inflation by maintaining the main interest rate at a high level. In the second half of 2023, it gradually raised the rate over 5 months from 7.5 percent to 16 percent. Despite these significantly restrictive policies, domestic demand continues to pose a pro-inflationary risk. Therefore, as the authors note, the bank's authorities do not rule out further increases, although this will likely hurt economic growth - write the authors of the Polish Economic Institute publication.

The report's authors also point to unconventional methods the Russian government employs to combat inflation. The Federal Antimonopoly Service (FAS) issued a warning letter to one of the largest information portals, Infoline, concerning the publication of inflation forecasts. The portal had reported an upcoming increase in building materials prices.

The report notes that FAS intends to monitor forecasts published by economists, arguing that negative forecasts fuel inflation expectations, which in turn artificially increases price growth.

The report also indicates that forecasting economic indicators in Russia is hampered due to the geopolitical situation. The main pro-inflationary risks are associated with changes in foreign trade conditions, including geopolitical tensions, and the persistence of high inflation expectations. High government spending, particularly on military purposes, is an additional pro-inflationary factor.

Under such conditions, as the authors summarize, it will be difficult for the Russian government to achieve economic stabilization.

Russia also faces other problems. The United States announced a broad package of sanctions on Wednesday, targeting Vladimir Putin's "war machine." The new restrictions have affected the Moscow stock exchange, which responded by suspending trading in dollars and euros. "The ruble is collapsing," announced "The Kyiv Post."