Russian central bank raises rates and warns on inflation

Nabiullina says labour market poses “serious challenge” and obliquely mentions risk of war
Elvira Nabiullina 2
Bank of Russia governor Elvira Nabiullina
Photo: Ekaterina Shtukina/Kremlin.ru/Wikimedia Commons

The Bank of Russia’s board of directors raised rates for the eighth consecutive meeting as it warned that inflation was significantly above its forecasts.

The board raised the key rate by 100 basis points to 10.5% today (February 11), in its first meeting of the year. Governor Elvira Nabiullina said that, “contrary to our expectations, inflation trends have not reversed,” adding “the steady components of inflation have even strengthened”.

Nabiullina’s statement said that difficulties in supply chains were one serious challenge, and labour market tightness was likely to be a larger problem. She briefly mentioned “geopolitical risks”, amid growing fears that Russia may invade Ukraine.

The Bank of Russia’s monetary policy statement was more specific. It admitted that yields on medium- and long-term Russian sovereign coupon-bearing bonds, called OFZs, had “increased mainly due to elevated geopolitical tensions”.

Russian year-on-year inflation reached 8.73% in January, having grown in six of the previous seven months. “Accordingly, we will need a tighter monetary policy than we assumed previously,” said Nabiullina. The Bank of Russia raised its main policy rate seven times last year, from 5.25% to 9.5%.

The central bank statement said it was ready to increase policy rates further if the economy developed in line with its baseline scenario. This holds open the possibility of even sharper rises if inflation outstrips the central bank’s current baseline expectations.

The governor said the bank had made “a significant revision of the economic situation and its prospects”. The Bank of Russia said its revised baseline projection forecast that inflation would return to between 5% and 6% this year, reaching 4% in 2023.

Nabiullina said that the central bank forecast that GDP would grow by 2% to 3% in 2021. GDP growth would reach 1.5% to 2.5% in 2023, before returning to what the central bank considered a “steady rate” of 2% to 3% the year after.

“Serious challenge”

Russian GDP had “notably exceeded a balanced growth path” as the effects of the Covid-19 pandemic eased, Nabiullina said. Russian companies’ profits were double their pre-pandemic levels and unemployment was at a record low, she said.

“An overheating of the economy is a consequence of intensifying demand and supply gaps,” Nabiullina said. She said businesses faced significant problems from logistics bottlenecks and component shortages.

But the Russian governor said that a major tightening in Russia’s labour market was likely to prove an even stronger medium-term driver of inflation. “We consider this to be a more serious and longer-lasting challenge for a rise in supply than the persistent but still temporary logistics bottlenecks,” she said.

Rising oil and natural gas prices normally strengthen Russia’s currency, the ruble, as the country is a major hydrocarbons exporter. But the ruble has continued to weaken against foreign currencies in recent weeks.

“Geopolitical risks have intensified, as well,” Nabiullina said, in what is almost certainly a reference to a possible war between Russia and Ukraine. She did not expand on what effects these risks might have on the Russian economy.

Russia’s president, Vladimir Putin, has massed troops on the Ukrainian border and threatened an invasion. Since 2014, Putin has seized Crimea from Ukraine, and supported separatist forces fighting in the east of the country.

Western countries are increasingly threatening heightened economic sanctions against Russia in the event of an invasion. Russian authorities, including the central bank, have attempted to insulate the economy from such measures.

In late January, the ruble reached its lowest level against the dollar since the onset of the Covid-19 pandemic in March 2020, before recovering slightly earlier this month.

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