Efficient Strategy Proposed by Central Bank to Combat Inflation
Unleashing the Escalator:
The Bank of Russia's tight money policy seems to be cranking up the economic saving machine, giving a boost to the builders, car dealers, and other sellers by pushing them to keep their prices reasonable to offload their goods. The anticipated outcome is moderated price growth, a relief the regulators are excited to see.
On June 6, the key rate took a dip for the first time in almost three years, settling at 20% per annum. The announcement stated that the current inflationary pressure is steadily decreasing, although remains elevated. The central bank underscored its resolve to maintain a stern monetary policy for an extended period to steer inflation back to its target by 2026. According to the Bank of Russia's forecast, annual inflation will return to 4% next year and stabilize.
The beginning of June saw Russian Minister of Economic Development, Maxim Reshetnikov, declare a noticeable slowdown in inflation. Concurrently, Home of the Ruble's chair, Elvira Nabiullina, mentioned at a press conference following the central bank's board meeting on June 6 that pro-inflationary risks have eased but still overtake disinflationary ones. The central bank raises concerns that inflation perceptions among the public are not diminishing in the face of the inflation slowdown and the strengthening of the ruble.
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From the hints of the struggle:
Russia's economic atmosphere is a cauldron of pro-inflationary risks and disinflationary elements, influenced by recent monetary policy adjustments and structural challenges. Let's explore the key drivers of inflation:
The Arm of Inflation: Pro-Inflationary Risks
- The War Effort's Grip:
- expenditure is inflaming inflation by siphoning resources from the civilian economy, causing overheating of defense industries.
- With resources funneled to the war effort, economic imbalances persist, keeping inflation above the central bank's 4% target.
- Wobbling Currency and Plummeting Ruble:
- Despite a strong exchange rate, the rouble's devaluation risk remains potent due to foreign currency demand, budget policy sensitive to the rouble-dollar exchange rate, and the possibility of reversing speculative flows.
- If the rouble weakens, import prices increase significantly, since import goods account for over 40% of the non-food retail sales in Russia.
- Elevated Consumer and Business Expectations:
- and private sector inflation expectations are on the rise. In May, inflation expectations among Russian citizens increased to 13.4%, a jump from 13.1% in April, indicating ongoing anxiety regarding future price increases despite some moderation in actual inflation.
- Swelling Food and Service Prices:
- Food and service prices are still on an upward trajectory, fueling the inflationary environment and posing a particular threat to consumer welfare.
The Cooling Wind: Disinflationary Factors
- Icy Keys and Soaring Rates:
- The Bank of Russia has kept interest rates high, targeting borrowing costs and ramping down demand to reduce inflation.
- Ascending Ruble:
- From November 2024 to May 2025, the rouble appreciated more than 30%, momentarily alleviating import price pressures and contributing to the slowdown in inflation, particularly for non-food goods.
- The solid rouble played a hand in painting a rosy picture of economic progress, as inflation showed signs of moderation.
- Pausing Pulse of Economic Activity:
- The civilian sector has stumbled due to high interest rates and resource drain, leading to decreased demand and a corresponding reduction in broader price rises.
- GDP growth has waned, while the output in some civilian industries has contracted, decelerating broad-based price increases.
- Taming the Beast: Inflation Moderation and Policy Signals:
- Recent data suggest annual inflation slowing to around 9.8–9.9% as of early June 2025, down from earlier peaks, and weekly inflation rates have also decelerated.
- Officials, including the government and central bank, view this as a "soft landing," indicating a managed price downturn through strategic policy measures.
Summing Up:
In summary, the Bank of Russia's recent monetary easing and the momentary stability of the rouble offer a temporary breathing space, but the Russian economy remains vulnerable to intense pro-inflationary pressures arising from structural imbalances, currency risks, and persistent inflation expectations, along with disinflationary effects originating from tighter monetary policy and a waning economy.
- In the wake of the Bank of Russia's key rate reduction, the finance sector is expected to experience some relief, as lower interest rates may stimulate business activities and investment, contributing to the overall economic growth.
- The disinflationary factors, such as the ascending Ruble and tighter monetary policy, are projected to continue playing a crucial role in moderating inflation, given the bank's resolve to maintain a steady monetary policy for an extended period to reach its 4% inflation target by 2026.
