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Nightmares About 2,500% CPI to Frame Interest-Rate Debate

Elvira Nabiullina, chairman of Russia's central bank. Photographer: Andrey Rudakov/Bloomberg
Elvira Nabiullina, chairman of Russia's central bank. Photographer: Andrey Rudakov/Bloomberg

Russian memories of hyperinflation are giving the central bank scope to keep raising interest rates should prices spiral following a government ban on U.S. and European food imports.

That’s because inflation remains the top concern of the nation’s 143 million people, according to a July poll by the state-run VTsIOM research center. Price increases that peaked at more than 2,500 percent in the 1990s aren’t easily forgotten and signs inflation expectations are becoming unanchored are raising the stakes. Bets that rates will rise were at the highest in two weeks yesterday.

Bank of Russia Chairman Elvira Nabiullina has said she’s prepared to keep boosting the benchmark rate, which has climbed 250 basis points since March to 8 percent, even as higher borrowing costs threaten to tip the economy into a recession. The ruble has tumbled and bonds dropped this year as Russian support for Ukraine separatists and the downing of a Malaysian passenger plane led the U.S. and European Union to target the finance, energy and defense industries, and to yesterday’s import ban in response.

“High inflation is politically unacceptable,” said Robert Kahn, a senior fellow for international economics at the Council on Foreign Relations in Washington. “They cannot allow inflation to rise much above where it is now,” said Kahn, who’s previously worked at the U.S. Treasury, the World Bank and the International Monetary Fund.

Forced Response

Russian import bans on an array of food goods from the U.S. and Europe may further fuel food costs, which rose at an annual rate of 9.2 percent in July. Vladimir Tikhomirov, an economist at BCS Financial Group, said he sees inflation at 7 percent by year end because of the food ban, after predicting a 6.6 percent rate earlier.

“This suggests a big hike in food prices, and the headline CPI,” Timothy Ash, the chief economist for emerging markets at Standard Bank Group Ltd. in London, said in a note yesterday. “The Russian central bank will be forced to respond with higher policy rates, which will mean lower investment and growth –- and accentuating a cycle of decline in Russia.”

After Russian inflation peaked in 1992 following the collapse of the Soviet Union, it dropped to as little as 5.6 percent in 1998. It then surged to more than 100 percent after the country defaulted on domestic debt in the same year. Price growth has averaged 11.8 percent this century.

Blacklisted Billionaires

Traders increased bets for higher interest rates today, with the premium on three-month forward-rate agreements rising to 27 basis points above the MosPrime rate, data compiled by Bloomberg show. This signals expectations for a quarter-point rate increase by November.

The EU has blacklisted billionaires close to President Vladimir Putin and the U.S. has said it’s considering further punitive steps on Russian businesses. That comes in addition to asset freezes, visa bans and curbs to capital-market access for some state-run banks after the passenger jet was downed in July over east Ukraine, the scene of deadly separatist unrest since March.

Russia’s $2 trillion economy has a 50-50 risk of slipping into a recession, a Bloomberg survey showed in July.

The penalties hurt the ruble, which has lost 9.9 percent against the dollar this year, the worst performance after the Argentine peso among 24 emerging-market currencies tracked by Bloomberg. The ruble slid 0.6 percent to 36.4700 per dollar as of 2:30 p.m. in Moscow.

Cigarettes, Food

The weakness has fed through into the cost of goods and services, keeping inflation over 7 percent for four straight months. The yield on Russian 10-year debt, which reached a five-year high this week, rose one basis point to 9.91 percent today.

Escalation of tension in Ukraine may trigger more declines in the ruble, according to Neil Shearing, chief emerging-markets economist at London-based Capital Economics Ltd.

“It’s difficult to say how high rates could go,” he said by phone. “It obviously depends on the political arena, but double-digit territory is perfectly plausible.”

About 82 percent of Russians anticipate prices will increase in the next month, a poll published July 20 by the Public Opinion Foundation showed. Faster price growth risks denting Putin’s approval rating, which has jumped to 87 percent since he annexed Ukraine’s Crimea peninsula in March.

“Prices for cigarettes and everything else -- things like food -- have changed,” Argishty Ginoyan, a 25-year-old economist said in central Moscow two days ago. “I don’t deny myself anything yet, but I know prices will keep growing like that. The economic situation will get worse.”

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