These mega rate hikes likely have Putin’s support because inflation can become a political bitch.
By Wolf Richter for WOLF STREET.
In another shock-and-awe move to douse raging inflation that is making no effort at being transitory, the Bank of Russia raised its policy rate by 75 basis points today, to 7.5%, its sixth rate hike, and the largest hike since the 100-basis-point hike on July 23. And it held the door open for more rate hikes.
“This is a significant increase and, obviously, this is not a fine-tuning exercise,” Bank of Russia Governor Elvira Nabiullina said in her post-meeting statement.
“This decision is driven not only by the current pace of inflation, but primarily by high inflation expectations and a considerable revision of the forecast,” she said.
A rate hike was expected but not of that magnitude. Only one of the 44 economists surveyed by Bloomberg had forecast a 75-basis-point hike; the other 43 saw a hike of 25 basis points or 50 basis points.
Since the rate-hike cycle began on March 19 with a surprise 25-basis-point hike, when economists had expected no rate hike, the Bank of Russia has raised its policy rate by 325 basis points, from 4.25% to 7.50%.
These mega rate hikes likely have the support of Putin who is coming under pressure from frustration over surging prices, particularly food prices, and those types of rate hikes would be unlikely without his support.
The Russian index for annual food price inflation jumped 9.2% in September, up from 7.7% in August. In its statement, the Bank of Russia noted specifically the rising prices of fruit and vegetables.
In her post-meeting comments, Governor Nabiullina explained the importance of food prices to inflation expectations: “Meat, milk, and vegetables are all the so-called marker products. When prices for marker products surge, even if their share in the consumer basket is rather small, this might speed up inflation expectations.” And “inflation expectations are already high,” she said.
The overall inflation rate in Russia soared to 7.4% in September, from 6.7% in August. The Bank of Russia cited a preliminary estimate through October 18 by which inflation jumped further to 7.8%. This is clearly going in the wrong direction.
“The balance of risks is markedly tilted to the upside. The effect of inflationary factors may be intensified by elevated inflation expectations and accompanying secondary effects,” the Bank of Russia said in its statement today.
“This largely reflects the fact that steady growth in domestic demand exceeds production expansion capacity in a wide range of sectors. In this context, businesses find it easier to pass higher costs, including on the back of rising global prices, on to consumers,” the central bank said.
Yup, same in the US.
“At the same time, the impact of one-off supply-side drivers of inflation translates into growing prices for a wider range of goods and services as inflation expectations of households and businesses remain high and unanchored,” it said.
Yup, same in the US. Note the term “unanchored.” This is exactly what has happened in the US, where inflation expectations have spiked.
“The dominating influence of inflationary factors could lead to a more substantial and prolonged upward deviation of inflation from the target,” the statement said.
Russia’s overall rate of annual inflation in September of 7.4% was just 2 percentage points higher than the US inflation measure of CPI-U (for urban consumers) and only 1.5 percentage points higher than CPI-W (for urban wage earners).
The Bank of Russia, by lifting its policy rate to 7.5%, roughly in line with the overall inflation rate, is just trying to remove stimulus. It is still not tightening. That would mean pushing short-term rates significantly above the rate of inflation.
The Fed, on the other hand, still has its foot all the way on the accelerator and, intoxicated with its official Wealth Effect dogma, is blowing through every red light at every intersection, printing $120 billion a month to repress long-term rates and repressing short-term rates to near 0%, despite 5.4% CPI-U inflation and 5.9% CPI-W inflation. This will go down in history as one of the most reckless Feds ever.
But inflation becomes a political bitch. People – those who work for a living – hate it when they lose purchasing power, and they hate it when their raise gets eaten up by inflation, and they hate it when their dividends and interest income get eaten up by inflation.
Putin understands this. Among US policy makers, this understanding has not yet fully sunk in, though they’re signs that it is slowly spreading.
The Bank of Russia, like everyone else, has consistently underestimated just how much this inflation would continue to surge, and it keeps raising its inflation forecast, always a few steps behind, and it raised its inflation forecast to a range of 7.4–7.9% by the end of 2021.
But being a few steps behind is better than the Fed, which hasn’t even tried to catch up, is already miles behind, and is falling further behind with every passing day.
“The contribution of persistent factors to inflation remains considerable on the back of faster growth in demand relative to output expansion capacity,” the statement said.
The Bank of Russia has been using the term “persistent” in its statements at least since July, while the Fed is still slinging “transitory” and “temporary” around.
What is fascinating and refreshing is the clarity of the statements in English issued by the Bank of Russia. They’re actually designed to be read by humans, not algos. The Fed could learn a lesson all around.
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