Russia Boosts Rates as Ukraine War Costs Mount

livemint.com:

Russia’s central bank raised its key interest rate Friday for the first time since shortly after the invasion of Ukraine, a response to a difficult new period for the economy of labor shortages, a weakened ruble and resurgent inflation. The Russian economy fell into a recession last year but survived the onslaught of Western sanctions thanks to a windfall of oil and gas revenues, state handouts and the ability to quickly reroute trade from Europe to Asia. Economists expect Russia to eke out positive growth this year.

But the fresh rise in rates—a bigger move than expected—is a sign that the economy is now at an inflection point. The factors that supported it last year have diminished and new pressures have emerged. “Russia’s macroeconomic stability is now in a more vulnerable position than at any point since the war started," said Liam Peach, senior emerging markets economist at Capital Economics.

A falling currency, propelled lower by the Wagner mercenary group’s aborted mutiny last month, soaring wages and booming debt-fueled state spending have reignited inflationary pressures, necessitating the rate increase. While Russia’s headline inflation rate appears low, at just 3.25% year-over-year in June, that is a sharp increase from the 2.5% rate in May. Much of the increase in prices is masked by the high comparison base from the post-invasion shock last year.

Recent weekly numbers have come in above expectations and economists forecast that consumer prices will rise sharply in the coming months. On Friday, in an effort to head off a pickup in inflation, the central bank enacted a full percentage point rate increase to 8.5% from 7.5%. Economists had expected a half-percentage point rate rise.