Russia holds rates, but tone shifts to greater inflation risk


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MOSCOW — Russia’s central bank held its key interest rate at 7.5% at its final meeting of the year on Friday but slightly shifted its rhetoric towards growing inflation risks as the country’s military mobilization was adding to labor shortages.

“The medium-term balance of risks remains tilted towards pro-inflation risks,” the bank said in a statement. “Labour shortages are increasing in many industries amid the effects of the partial mobilization.”

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The bank’s rate-cutting spree ended in September, after the gradual reversal of an emergency rate hike to 20% in late February that followed Russia’s decision to send tens of thousands of troops into Ukraine and the imposition of wide-ranging Western sanctions.

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The Bank of Russia has made six rate cuts since February, but has now held rates at 7.5% at its last two meetings.

On Friday, like in October, it warned that the partial military mobilization, ordered by President Vladimir Putin in September, could stoke inflation due to a shrinking labor force.

The mobilization order saw hundreds of thousands of Russians flee the country or join the army.

The bank said labor market conditions and logistics problems were significantly limiting economic activity and the capacity to expand production.


Inflation, which the central bank targets at 4%, stood at 12.65% as of Dec. 12, according to the economy ministry. The central bank’s year-end inflation forecast is 12-13%.

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“(The central bank) emphasized that inflation risks have become slightly more skewed to the upside,” said Liam Peach from Capital Economics. “This reinforces our view that the easing cycle is unlikely to resume until around mid-2023.”

With an oil embargo and price cap taking effect, as well as significant increases in budget spending, the central bank’s wait-and-see approach looks sensible, said Azret Guliev of MKB Investments.

“The central bank has for now given a neutral signal to the market,” he said.

The central bank is caught in a bind between high inflation, which dents living standards, and an economy in need of stimulation via cheaper credit to tackle the negative effects of sanctions.

Russia’s economy, saddled with subdued consumer demand, falling disposable incomes and labor shortages, is on shaky ground, with mobilization set to be a significant drag in 2023.

Central Bank Governor Elvira Nabiullina will shed more light on the bank’s forecasts and policy in a media briefing at 1200 GMT.

The first rate-setting meeting of 2023 is scheduled for Feb. 10. (Reporting by Alexander Marrow; additional reporting by Elena Fabrichnaya and Jake Cordell; Editing by Mark Trevelyan and Arun Koyyur)


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