With Fed Still Stoking The Fire, Bank of Russia Launches Shocking Rate Hikes Amid Raging ‘Persistent’ Inflation, But U.S. Inflation Not Much Below Russia’s

With Fed Still Stoking The Fire, Bank of Russia Launches Shocking Rate Hikes Amid Raging ‘Persistent’ Inflation, But U.S. Inflation Not Much Below Russia’s

These mega-rate hikes probably have Putin’s backing because inflation can get a political bitch.

By Wolf Richter for WOLF STREET.

In another move of shock and fear to quell raging inflation that makes no effort to be transient, the Bank of Russia raised its policy rate by 75 basis points today, to 7.5%, its sixth rate hike and the biggest hike since a 100 basis point hike on July 23. And that opened the door to further rate hikes.

“This is a significant increase and obviously not a fine-tuning exercise,” Bank of Russia Governor Elvira Nabiullina said in her post-meeting statement.

“This decision is motivated not only by the current rate of inflation, but mainly by high inflation expectations and a significant revision of forecasts,” she said.

A rate hike was expected but not of this magnitude. Only one of 44 economists polled by Bloomberg had forecast a 75 basis point hike; the other 43 saw an increase of 25 basis points or 50 basis points.

Since the start of the rate hike cycle on March 19 with a surprise 25 basis point hike, when economists expected no rate hike, the Bank of Russia has raised its key rate by 325 basis points , from 4.25% to 7.50%.

These mega-rate hikes likely have the backing of Putin who is under pressure from frustration with soaring prices, especially food prices, and these types of rate hikes would be unlikely without his support.

Russia’s annual food price inflation index jumped 9.2% in September, from 7.7% in August. In its statement, the Bank of Russia noted in particular the rise in prices of fruits and vegetables.

In her comments after the meeting, Governor Nabiullina explained the importance of food prices for inflation expectations: “Meat, milk and vegetables are all so-called marker products. When the prices of marker products increase, even if their share in the consumption basket is rather small, this could accelerate inflation expectations. And “inflation expectations are already high,” she said.

The headline inflation rate in Russia climbed to 7.4% in September from 6.7% in August. The Bank of Russia cited a preliminary estimate until Oct. 18 that inflation jumped again to 7.8%. This is clearly going in the wrong direction.

“The balance of risks is clearly on the rise. The effect of inflationary factors can be intensified by high inflation expectations and the accompanying side effects, ”the Bank of Russia said in its statement today.

“This largely reflects the fact that steady growth in domestic demand exceeds the capacity to expand production in a wide range of sectors. In this context, companies find it easier to pass on the higher costs, in particular due to the rise in world prices, to consumers, ”the central bank said.

Yes, ditto in the USA.

“At the same time, the impact of one-off supply-side inflation factors translates into higher prices for a wider range of goods and services, as the inflation expectations of households and companies remain high and unchecked, ”he said.

Yes, ditto in the USA. Note the term “unanchored”. This is exactly what happened in the United States, where inflation expectations have skyrocketed.

“The dominant influence of inflationary factors could lead to a larger and prolonged upward deviation of inflation from the target,” the statement said.

Russia’s overall annual inflation rate in September of 7.4% was only 2 percentage points higher than the US measure of CPI-U inflation (for urban consumers) and only 1 .5 percentage point higher than the CPI-W (for urban employees).

The Bank of Russia, by raising its key rate to 7.5%, roughly in line with the headline inflation rate, is simply trying to remove the stimulus measures. He’s still not squeezing. This would mean pushing short-term rates significantly above the rate of inflation.

The Fed, on the other hand, is still on the accelerator and, intoxicated by its official dogma of the wealth effect, blows out every red light at every intersection, printing $ 120 billion a month to crack down on long-term rates. term and suppressing short-term rates to nearly 0%, despite CPI-U inflation of 5.4% and CPI-W inflation of 5.9%. He will go down in history as one of the most reckless Feds of all time.

But inflation is becoming a political bitch. People – those who work for a living – hate when they lose their purchasing power, and they hate when their growth is eaten away by inflation, and they hate when their dividends and interest income is eaten away. ‘inflation.

Putin understands this. Among US policymakers, this understanding has not yet fully penetrated, although these are signs that it is slowly spreading.

The Bank of Russia, like everyone else, has systematically underestimated how much this inflation will continue to rise, and it continues to raise its inflation forecasts, always with a few steps behind, and it has raised its forecasts. inflation in a range of 7.4 to 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 and further behind with each passing day.

“The contribution of persistent factors to inflation remains substantial due to faster growth in demand relative to the capacity to expand production,” the statement said. And he held the

The Bank of Russia has used the term “persistent” in its statements at least since July, while the Fed still uses the terms “transient” and “temporary”.

What is fascinating and refreshing is the clarity of the statements in English issued by the Bank of Russia. They are in fact designed to be read by humans, not by algos. The Fed could learn a lesson all around.

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