By Alexander Marrow
MOSCOW (Reuters) -Russia’s central bank held its key interest rate at 7.5% at its final meeting of the year on Friday but slightly shifted its rhetoric to acknowledge growing inflation risks, saying a recent military mobilisation was adding to labour shortages.
“We gave a neutral signal. This means the next decision, the trajectory of the rate, will depend on the incoming data, on which factors – pro-inflationary or disinflationary – will prevail,” Governor Elvira Nabiullina told a news conference.
“In our opinion, pro-inflationary factors prevail now, not only over the medium-term, but also over a short-term horizon. Therefore, rate changes will depend on incoming data. It is possible to hold the rate, increase it or decrease it – if disinflationary factors are realised, which we believe are weaker right now.”
The Bank of Russia has kept policy on hold since September, after six rate cuts that gradually reversed February’s emergency rate hike to 20%. That action came after Russia sent tens of thousands of troops into Ukraine, prompting Western countries to impose wide-ranging sanctions.
On Friday, as in October, it warned that the partial military mobilisation ordered by President Vladimir Putin in September could stoke inflation due to a shrinking labour force.
Hundreds of thousands of Russians have since joined the army or fled the country.
“Labour shortages are increasing in many industries amid the effects of the partial mobilisation,” the bank said, adding that labour market conditions and logistics problems were limiting economic activity and the capacity to expand production.
Nabiullina said the impact of a Western price cap on Russian oil, introduced this month, was hard to assess, but the bank would consider this at its next meeting in February.
RHETORIC SHIFT
Inflation, which the central bank targets at 4%, stood at 12.65% as of Dec. 12, according to the economy ministry. The central bank’s year-end inflation forecast is 12-13%.
“(The central bank) emphasised that inflation risks have become slightly more skewed to the upside,” said Liam Peach from Capital Economics. “This reinforces our view that the easing cycle is unlikely to resume until around mid-2023.”
With an oil embargo and price cap taking effect, as well as significant increases in budget spending, the central bank’s wait-and-see approach looks sensible, said Azret Guliev of MKB Investments.
“The central bank has for now given a neutral signal to the market,” he said.
The central bank is caught between the need to tackle high inflation, which dents living standards, and stimulating the economy via cheaper credit to counteract the negative effects of sanctions.
Russia’s economy, saddled with subdued consumer demand, falling disposable incomes and labour shortages, is on shaky ground, with mobilisation set to be a significant drag in 2023.
(Reporting by Alexander Marrow; additional reporting by Elena Fabrichnaya and Jake Cordell; Editing by Mark Trevelyan, Arun Koyyur and Catherine Evans)
