Russia refrains from raising rates even as war economy overheats

Russia refrains from raising rates even as war economy overheats

Russia's central bank extended its pause on interest rates, But he noted that monetary tightening remains an option as the country's war in Ukraine continues to overheat the economy and fuel inflation.

For the fourth consecutive meeting, authorities kept their benchmark at 16% on Friday. A narrow majority of economists surveyed by Bloomberg had predicted a maintenance, while the rest expected an increase.

He Bank of Russia said in a statement that “keeps open the prospect of raising the key rate at its next meeting.” The ruble changed little after the decision. “Returning inflation to target will require a significantly longer period of maintaining tight monetary conditions in the economy than anticipated in April,” the central bank said.

Officials had signaled they were seriously considering what their first rate hike would have been this year. Governor Elvira Nabiullina will comment on the decision at a press conference scheduled for five in the afternoon in Moscow.

Local money markets have placed a 50% probability for a rate hike in June and a 100% probability in July, according to Bloomberg Economics estimates.

With government spending increasing, Nabiullina has become tougher as economic growth, local demand and price increases have consistently exceeded the central bank's expectations. Even so, It might have been too early for the central bank to know if the currently high key rate is not trickling down to the economy, according to Olga Belenkaya, an economist at Finam in Moscow.

While a persistent labor shortage is fueling a wage race, production has failed to keep pace with demand. Additionally, the unusually cold weather in May has caused some crop failure, meaning “the risk of a new food price shock has increased,” according to Tatiana Orlova of Oxford Economics, who expected an increase to 17% on Friday.

Even so, Recent comments from the central bank indicated that rate setters were willing to wait. Slowing inflation requires a cooling of demand, which means maintaining tight monetary conditions for a long time, the central bank said in a May report. Additional tightening could be necessary “if disinflation does not resume in the coming months,” he said.

There are signs of facilitating consumer activity. Retail sales growth slowed to 8.3% in April after reaching 11.1% in March on an annualized basis. However, the labor shortage worsened further and the unemployment rate fell to a new historic low of 2.6%.

What's more, inflation in Russia has soared over the past two months after a slowdown in March. Price growth accelerated for four consecutive weeks and exceeds 8% annually, more than double the central bank's target of 4%.

The rebound in price growth could intensify a rebound in inflation expectations, one of the key indicators watched by rate setters. That indicator increased for the first time this year in May to 11.7%.

“To make the decision to raise the interest rate, The Bank of Russia must first come to the conclusion that the adjustment already achieved will not be enough even if the rate remains at the current level for a longer period,” Finam's Belenkaya said in a note. “This conclusion is not yet obvious.”