War Handcuffs Russian Central Bankers Watching Demise of Economy

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Russia’s central bank has been relegated to the role of bit-part player as war and international sanctions devastate the country’s economy.

A meeting in Moscow on Friday will be little more than a cameo for the Bank of Russia in an economic drama playing out across the world’s biggest country, as the wipeout of household wealth, food shortages and a dash for the exits by foreign companies and Russians shatter three decades of policy making after the Soviet collapse.

Governor Elvira Nabiullina is headed into her first regular review of interest rates since the invasion of Ukraine led to sweeping sanctions and handcuffed the central bank after the seizure of an estimated two-thirds of its $643 billion in foreign reserves.

Following an emergency hike that more than doubled the key rate to 20%, the central bank is set to keep the benchmark at the highest in almost two decades, according to all but five of the 31 economists surveyed by Bloomberg. The rest forecast increases of three to five percentage points.

“The emergency hike had the goal of limiting deposit outflows and, together with the tight foreign-currency restrictions, apparently it had an impact,” said Olga Belenkaya, economist at Investment Co. Finam in Moscow. “Inflation will renew records and can possibly come close to 20% in the coming weeks.”

Capital controls, a shuttered stock market and the seizing up of trade are taking the spotlight off interest rates as the go-to tool for restoring calm at home. Before the war, the central bank won economists’ praise for delivering three 100 basis-point hikes in less than a year to get a grip on inflation.

The Bank of Russia has yet to revise its forecasts for inflation and the economy after the invasion, but annual price growth already reached an estimated 12.54% as of March 11, from just above 9% at end-February.

After the central bank makes an announcement at 1:30 p.m. in Moscow, Nabiullina will explain the decision at 3 p.m. But in a departure from recent months, she will take no questions from reporters, repeating the format she used following the emergency rate move on Feb. 28.

What Our Economists Say:

“The central bank faces tough choices, and the only comfort may be that it’s too soon for action on rates. A reduction would help prevent a credit crunch, but nose-bleed rates are probably still needed to compensate deposit holders, especially as inflation spikes.”

–Scott Johnson.

The U.S. Federal Reserve has meanwhile signaled hikes at all six remaining meetings this year after raising rates by a quarter point on Wednesday, its first increase since 2018. Major emerging markets from Brazil to South Africa have also opted to elevate borrowing costs to contain price pressures.

But the severity of economic challenges is sidelining monetary policy in Russia. The war and the fallout that followed have inflicted a domestic toll that’s already comparable to the worst downturns of President Vladimir Putin’s more than two decades in power.

Adding to the inflation shock, Russia is seeing shortages of food staples while imported goods are growing increasingly scarce. Putin said this week that the nation survived “the economic blitzkrieg” but warned of rising joblessness and faster inflation to come.

“Monetary policy has moved backstage,” VTB Capital economists Alexander Isakov and Rodion Latypov said in a note. “The financial account is, for practical purposes, closed, which means that the domestic interest rate policy is less sensitive to external developments.”

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