Russian Inflation at Five-Year Peak Boosts Chances for Rate Hike
Russian inflation hit a five-year high in August, fueling expectations that the central bank will opt for a bigger hike in its key rate Friday.
Annual inflation reached 6.7% in August, the Federal Statistics Service reported late Wednesday, with the closely watched core rate that excludes volatile components like fuel and produce, running even higher at 7.1%. The figures undermined hopes that price pressures were beginning to ease and added to fears that inflation expectations -- a major concern for the Bank of Russia -- will continue to rise.
“We treat such a trend as an argument for the rate hike by 50 basis points,” said Luiz Saenz, head of international distribution at Sinara in London.
Even before the release, investors’ fears about a bigger hike Friday sapped demand at Wednesday’s weekly government-bond auction.
What Our Economists Say:
“The extended spike in inflation mostly reflects food and fuel, but demand is also adding to price pressure, and that’s a dangerous combination when expectations aren’t anchored to the target. We expect a half-point rate hike on Friday, along with cautious guidance.”
-- Scott Johnson, Bloomberg Economics. Read more
Facing parliamentary elections next week, the Kremlin has added to fears of further price pressures with nearly 700 billion rubles ($9.6 billion) in new social spending. Officials say the largesse won’t fuel inflation this year but economists aren’t so sure.
The Bank of Russia has raised rates 225 basis points so far this year. But Goldman Sachs Group Inc. analyst Clemens Grafe says inflation will rise further this month to 6.9%, before slowing to about 6% by the end of the year -- still well above the central bank’s 4% target. Grafe forecasts the Bank of Russia will raise the rate by half a percentage point Friday.
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