Interest rates set to stay higher for longer

Hello! Welcome to your weekly guide to the Russian economy, written by Alexander Kolyandr and Alexandra Prokopenko and brought to you by The Bell. Our focus this week is on how the Central Bank will have to keep higher interest rates in place for longer, raising the prospects of stagflation. We also cover diverging sanctions policies between Europe and the United States.

Russia’s Central Bank—between a rock and a hard place

Next week the Central Bank will make its penultimate interest rate decision of the year. The latest data and rhetoric both suggest that even an anticipated cut of 100 basis points—which would take the key rate to 16%—might not be on the table anymore. The Bank is caught between an ever-more-obvious structural slowdown in the economy (which requires lower rates to stimulate borrowing and demand) and stubbornly high inflation, which makes cutting rates difficult. An extra element this time around is rising fuel costs due to Ukrainian strikes on refineries.

Russia bucks global trend of stronger forecasts

Russia’s high borrowing costs—imposed to fight still-high inflation (running at 7.98% in annual terms in September, or 0.34% over the month)—is one of the main reasons for the economic slowdown. The government itself has recognized how close Russia is to stagnation, with the Economic Development Ministry this month cutting its GDP growth expectations to 1% this year (down from 2.5%) and 1.3% next year (down from 2.4%) We already explained our doubts about the reliability of even those predictions, which are based on stable oil prices and the absence of significant sanctions.