Stagflation risks add arguments for raising the Central Bank’s key rate

The Bank of Russia has more arguments for raising the key rate, writes Kommersant (Kommersant) cited the latest portion of data published before the meeting of the regulator’s board of directors on this issue (to be held on Friday, September 13).

Thus, the Central Bank’s monitoring of enterprises recorded a decrease in the general business climate index from 6.8 to 5.7 points, which occurred against the backdrop of a sharp deterioration in estimates of current output and demand to the lows of late 2022. At the same time, expectations regarding output and demand, on the contrary, are growing (from 12.6 to 13.4 points), which is likely due to the prospect of increasing government support, the material notes. “The report highlights the risks of stagflation – a drop in output with increased inflation trends,” the opinion of Dmitry Polevoy from Astra UA is quoted there.

Noting that the overall balance of arguments for the upcoming Central Bank meeting remains the same, he acknowledged that elevated inflation expectations in retail – retailers expect that over the next three months, retail prices will grow by more than 11 percent year-on-year – are a cause for concern. As Alexander Isakov from Bloomberg Economics clarified, this indicator is considered one of the most reliable leading indicators of inflation over a one- to two-month horizon.

Commenting on the previous decision of the board of directors, the Chairman of the Central Bank Elvira Nabiullina stated that the country’s economy is still in a state of significant overheating, and without raising the key rate there would be risks of stagflation.

Experts do not consider the option of raising the rate on Friday a foregone conclusion. Thus, some believe that the expected increase will be postponed until October in order to obtain more data on the state of the economy. At the same time, most experts generally agree that the rate will increase before the end of the current year.