Russian consumer price inflation keeps accelerating to 8.9% year on year in November 2024 from 8.5% y/y seen in October, revised upwards from previous estimates by RosStat statistics agency. (chart)

In the beginning of December the weekly inflation numbers point to further acceleration of consumer prices to 9.3% y/y, breaching the full-year guidance of the Central Bank of Russia (CBR). Between December 2 and 9, weekly consumer price growth accelerated again to 0.48% week on week, well above the seasonal norm. 

As followed by bne IntelliNews, towards the end of the year inflationary pressure could only intensify due to higher food prices ahead of holidays (chart), in addition to the most recent severe weakening in the ruble, and the seasonal hike in both state and household spending.

The CBR has been struggling to reign in runaway inflation, which peaked in July at 9.1% in July and has only fallen slightly since then. The CBR will have a monetary policy board meeting on December 20 and is expected to keep raising the key interest rate which is already at record 21%.

“The renewed acceleration in Russian inflation to 8.9% y/y in November, and likelihood of further increases in the coming months, argue strongly in favour of another large interest rate hike from the central bank next week. We’re expecting at least a 200 basis point rate hike, to 23%,” Capital Economics commented, arguing that the acceleration in inflation is likely to continue. 

“Weekly inflation figures have remained hot and inflation now looks set to rise far above 9% y/y by year-end. With firms’ price expectations also hitting new highs recently, there’s a clear argument that the central bank is losing the battle against inflation and that it will be forced to hike rates sharply again next week,” Capital Economics analysts argue.

Renaissance Capital analysts agree that “the inflation picture does not allow us to expect any other outcome of the Central Bank of Russia's December [20] meeting other than a 2 percentage point increase in the key rate [to 23%]”. 

“The only intrigue, however, is the regulator's signal in view of the first signs of slowdown in corporate lending,” RenCap analysts note referring to most recent banking sector statistics for November.

In the meantime, as already highlighted by bne IntelliNews, stubborn price growth has become a key policy challenge and the CBR is coming under increased pressure to address inflation challenges differently.

The Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), a think-tank linked to the government, believes that money in Russia is too expensive, and the Central Bank is also strangling the economy with a tight monetary policy, according to a report by The Bell.

In its November analytical note, the institute recommended lowering the key rate to 15%-16% by mid-2025 to prevent stagflation of the economy. 

However, Russia cannot get out of stagflation using the US "Reaganomics" scheme of the 1980s via attracting foreign investment due to sanctions, which means it is left with a shock with a decline in production, bankruptcies and mass non-payments similar to the Mexican recession of the beginning of the century, the analysts at CMASF warn.

In the meantime the problems in the Russian real sector continue to accelerate, CMASF analysts argue. In many industries, the share of companies struggling with debt exceeding 50% of revenue grows. Almost 19% of the real sector of the economy by revenue will be at risk of bankruptcy due to the increased credit burden with the expected rate increase in 2025.

bne IntelliNews analysed how Russian companies are getting trapped in a debt spiral, borrowing heavily, despite sky-high interest rates.

In addition, high interest rates deprive businesses of incentives to invest. The return on investment is higher than risk-free investments in OFZs federal bonds (that now yield over 20%) in only a few industries – oil, gas and ore mineral extraction, transport, printing and chemistry without pharmaceuticals. 

"As a result, the [high key interest] rate is a powerful de-stimulator of investment, and therefore of the expansion of supply (and therefore of lower inflation) in the future," CMASF concludes.

 

 

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