Bad moment to hike rates as Russia’s growth stimuli sputter – economists

By Darya Korsunskaya and Alexander Marrow

(Reuters) – Double-digit interest rates and the possibility of more hikes down the road have come at a bad moment for Russia’s economy as the impact of higher industrial production and soaring defence spending wane, Russian economists said.

The Bank of Russia jacked up rates to 13% on Friday and renewed its hawkish guidance, warning of high rates “for quite a long time” as authorities grapple with a weak rouble and persistently accelerating inflation.

The fallout from Moscow’s invasion of Ukraine in February 2022 sent the Russian economy into a 2.1% decline last year and although it has recovered so far this year, economists expect economic prosperity to suffer in the longer term.

“High-frequency data on economic dynamics show that economic activity has started stagnating in recent months, with a tendency towards slight decline,” wrote economists from Russia’s Centre for Macroeconomic Analysis and Short-term Forecasting in a September review. “Stagnation or decline has been observed both in household consumption and investment.”

President Vladimir Putin said on Monday the economy’s recovery phase was now complete, with consumer demand increasing and industry moving along steadily.

But according to the central bank, increased consumer demand and lending have fed into rouble weakening and elicited rate hikes, and ultimately needs to be eased.

“The moment for the monetary authorities’ ‘cooling’ actions (key rate hike, likely sequestration of budget spending and possibly more rate hikes) was chosen extremely unsuccessfully,” the economists wrote.

“This braking impulse, unfortunately, has come at the exact moment of the old stimuli for growth being exhausted (state-supported construction, state defence orders) and the possible moment of new ones being formed, including those determined by private investment, which is de-stimulated by the rate increase, which could lead to prolonged stagnation in the long term.”

Rising war spending costs have supported Russia’s modest economic recovery this year with higher industrial production, but, along with falling export revenues, have pushed budget finances to a deficit of around $24 billion so far this year.

Eliminating seasonal factors, industrial production growth began declining year-on-year in July, the economists said.

Analysts from Russia’s state development bank VEB said that several growth indicators that were robust last year and in H1 2023 now looked close to exhaustion.

“Construction, which has been an important driver of recovery growth, is already showing declining volumes for the second month running,” they wrote, adding that services, demand for which was stable during the crisis period, were declining too.

(Reporting by Darya Korsunskaya and Alexander Marrow; editing by Mark Heinrich)


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