Russia's Central Bank is expected to raise its key interest rate to curb the high inflation that has followed Vladimir Putin's invasion, but one expert said that even higher "shock therapy" rises are needed to cool the overheated wartime economy.
Russia has so far weathered relatively well the turbulence of sanctions imposed to isolate the country from the global financial system as punishment for Putin's aggression. However, there are concerns of economic problems on the horizon.
Expected 2024 growth of 2.9 percent has been boosted mostly by government spending on the military, but it comes amid a labor shortage that has spiked wages and fueled annual inflation, which, at 8.6 percent, is over twice the 4 percent Central Bank has targeted. Newsweek has contacted the Russian Central Bank for comment.
To tighten monetary policy and curb inflation, the key Central Bank interest rate at which other banks can borrow is expected to rise from 16 percent to 18 percent when the institution meets on July 26, according to Russian business outlets RBC and Vedemosti.
However, Alexei Antonov, head of investment consulting at Alor Broker, has said that even this increase will not be enough to cool the overheated economy. He did not rule the bank "resorting to the 'shock therapy'... of a 20 to 24 percent interest rate for a short time," reported Profinance.ru, a financial news outlet.
This would be much higher than the Central Bank's doubling to 20 percent from 9.5 percent. This was temporarily imposed as an emergency measure immediately after Putin's invasion in February 2022 amid fears of hyperinflation.
Another option would be to raise the rate to 18 percent this week and continue the cycle of increases in the future, although much depends on inflation targets and the outlet notes risks in raising the rate greater expected, Antonov told Profinance.
"The Central Bank of Russia needs to adopt a tougher stance than previously assumed as required to tame price pressures in an economy characterized by booming consumption and labor force shortages," Bartosz Sawicki, market analyst at Conotoxia fintech, told Newsweek.
"The looming increase should be perceived as an additional, one-off adjustment and mark the peak of the cycle."
Sawicki said that, as annual inflation gradually moves closer to the 5 percent mark in 2025, "borrowing costs should be cut. For now, the Central Bank should stick to hawkish rhetoric and underline its determination to get a grip on price gains."
Central Bank Governor Elvira Nabiullina last year compared Russia's economy to a driver pushing too hard on the accelerator. She said it will mean "we won't get far" and is openly talking about an overheating economy, despite Putin boasting about growth.
Independent Russian outlet The Bell reported last month that, amid increased Kremlin spending to pay for the war, "it's clear that interest rates are not doing much to suppress demand." It said that the Central Bank may have no choice about whether to raise rates, "merely a choice about how high they should go."
"Inflation expectations, which have been running in double digits since February 2021, seem prone to further de-anchoring as food prices rise," added Sawicki.
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