The CBR hikes the key rate by 200 bps as inflation remains high

RUSSIA ECONOMICS - In Brief 28 Oct 2024 by Evgeny Gavrilenkov

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Last Friday, the Central Bank hiked the key rate to 21%, well above market expectations. In October, inflation y-o-y will likely be about the same as in September, i.e., 8.6% or slightly higher. Note that inflation fell to low single-digit levels in 1H23 but has accelerated since then, driven by the unprecedented permanent rise of budgetary spending. The latter became one of the catalysts for a rapid rise in wages – not least because of lack of labor. The CBR also mentioned capacity constraints that limit production growth. Unsurprisingly, rapidly growing wages stimulate borrowing by households. The supply side cannot proportionally respond to permanently overheated demand. Hence, inflation rises, and the CBR makes permanent efforts to tackle at least some of the problems that emerge mainly due to budgetary spending, as there are no signs that the government may contain its spending appetite. As a result, despite the decent economic growth, the macroeconomic environment has become quite distorted, and it may take time to eliminate these distortions.