Russia’s central bank surprised the markets with a sharper-than-expected rate hike to 8.5% on Friday, raising the cost of borrowing as the weak rouble added to inflation pressure from a tight labor market and strong consumer demand. The move comes as Moscow faces a problematic new period of economic challenges following the invasion of Ukraine, which has left labor shortages and resurgent inflation in its wake.
Inflation spiked to a 20-year high in the aftermath of the Ukraine offensive and has dipped below the bank’s 4% target due to a favorable base effect and the rouble’s recent depreciation. However, it remains at risk of accelerating again. Inflation expectations are also high, which challenges the bank’s governor, Elvira Nabiullina, who struggles to rein in prices and consumer spending.
The bank raised its key rate by 100 basis points to a seven-year high of 8.5%, citing the deteriorating situation in currency markets and the broader economy. It also pointed to the impact of a lack of supply and an increased cost of imported goods, pushing up prices and increasing consumer demand. It said it would monitor the situation closely and “remains open to further key rate increases at its next meetings, aimed at stabilizing inflation close to 4%” in the long term.
It was the first time the bank had raised rates in more than a year, having gradually reversed an emergency hike to 20% in February last year after Russia sent its armed forces into Ukraine, prompting the West to impose sanctions on Moscow. The rouble had plunged then, adding pressure on the domestic economy and triggering fears of a recession.
Analysts had expected the bank to raise the rate by no more than 75 basis points to 8%. A rise of this magnitude would profoundly affect the economy, as it could push up prices of imported goods and drive up consumer spending, leading to further price rises.
While the Russian economy still suffers from the fallout of the Ukraine crisis and the impact of harsh Western sanctions, it remains a vast, dispersed market of 147 million people with per-capita incomes one-third higher than China’s. And while it may be challenging for global firms to reach this market, it offers substantial opportunity for those that understand its nuances and needs and can deliver on the potential of its consumers.
For example, our recent research found that 58% of Russian consumers are willing to pay more for goods that offer convenience or better service. And 40% indicate that they are willing to pay more for items they believe will help them to stay healthy. These findings show that despite their severe hardships, Russian consumers remain willing to spend when necessary for their survival and their families well-being.
