Russia Losing the Battle Against Inflation? Central Bank Raises Rates by 200 Basis Points

The Bank of Russia is expected to implement a substantial interest rate hike this week in response to surging inflation fueled by the ongoing conflict.

CNBC reported on Sunday that economists anticipate the Bank of Russia raising its key rate by 200 basis points (1 basis point = 0.01 percentage point) at its monetary policy meeting on December 20, potentially bringing the benchmark rate to 23%.

In a recent memo, Liam Peach, a senior emerging markets economist at Capital Economics, reported that Russian inflation accelerated last month, reaching an 8.9% year-over-year increase. He noted that further increases are likely in the coming months, making another significant rate hike by the central bank highly probable. Peach also mentioned that prices are expected to continue climbing, with inflation likely to exceed 9.0% year-over-year by the end of 2025 substantially.

Peach noted, “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 … A 200 basis point rate hike is the base case in our view, but there are arguments in favor of a larger hike.”

Russia’s Consumer Price Index (CPI) continues to rise despite the central bank’s series of interest rate hikes. November’s CPI showed an 8.9% year-over-year increase, a steeper climb from the previous month’s 8.5% rise. Food prices were the primary driver of the CPI surge. The ruble’s depreciation following new U.S. sanctions imposed last month also contributes to inflationary pressures.