On Friday, April 25th, Russia’s central bank raised its benchmark interest rate by 50 basis points to 7.5 per cent, giving higher inflation risks as a reason behind its decision.
‘The probability of inflation exceeding the 5 per cent target at the end of 2014 has increased substantially’, the Russian central bank said in a statement.
Annual inflation stood at 7.2 per cent as of April 21st. However, the central bank estimates that inflation would not exceed 6 per cent by the end of 2014.
The Russian economy expanded 1.3 per cent in 2013, the slowest pace of growth since a 2009 recession (for comparison, the economy grew 3.4 per cent in 2012). The Bank of Russia said in a downbeat statement on the economy: ‘Labour productivity growth is sluggish, while fixed capital investment continues to contract because of declining profits in the real sector, limited access to long-term financing in both international and domestic markets, as well as low producer and consumer confidence. Uncertainty about international political situation also hampers production and investment’.
The Russian central bank predicts that the country ‘will continue to witness a downward trend in economic growth’ in 2014, adding ‘Amid economic uncertainty and declining producer confidence there is a strong probability of a reduction in fixed capital investment. Combination of slower growth in real wages and a decline in household lending growth rates will have a dampening effect on consumer activity’.
Also on Friday, Standard and Poor’s, a credit rating agency, lowered Russia’s rating from BBB to BBB-, just one notch above junk status, citing destabilizing effects of capital outflows from the country. S&P’s may downgrade Russia’s sovereign debt rating even further, if new targeted sanctions against Moscow are implemented. This scenario is highly likely, because the crisis in Ukraine shows no signs of de-escalation.
The interim government in Kiev and the West have accused the Kremlin of co-ordinating and supporting separatists in eastern Ukraine. On April 24th, Ukraine’s armed forces began operations to remove illegal checkpoints on the outskirts of Slavyansk, a separatist stronghold. On the same day, Russia started military exercises along the border with Ukraine. President Putin warned the Ukrainian authorities in Kiev that there would be consequences for using the army against its own people and added that inter-state relations would be affected. Therefore, military exercises might be a cover for preparations for a Russian invasion in eastern Ukraine.
On April 25th, the Russian rouble fell 0.9 per cent against the US dollar, in spite of the rate hike, and the Micex stock index fell 1.6 per cent to a six-week low.
photo: Finnmark fylkeskommune / flickr.com / CC BY-ND 2.0