Posted By Jessica Weisman-Pitts
Posted on November 13, 2024
MOSCOW (Reuters) – Russia’s tight monetary policy has failed to curb price growth and has created risks of an economic slowdown, dragging the economy into stagflation, a combination of stagnant growth and inflation, a leading think-tank close to the government said.
The Russian central bank raised the key interest rate to 21% last month, the highest level in over 20 years, stating that it aims to curb inflation, which is currently running at 8.6%, and citing high inflationary expectations among the population.
The hike stirred indignation among many business leaders, who usually oppose the central bank’s policies, and also drew criticism from mainstream economists involved in shaping government policy.
The current high level of the key interest rate and the indicated prospects for further increases have created a risk of economic downturn and a collapse in investments in the near future,” TsMAKP, a think-tank advising the government, said on Wednesday.
The economists argued that the share of manufacturing firms with a debt servicing burden at a risky level of two-thirds of earnings before interest and tax will double to 20%, creating risks of corporate defaults and bankruptcies.
They also pointed out that with current risk-free interest rates in the economy at around 18%, five-year investment projects should yield at least 130% on the initial investment to make economic sense.
TsMAKP economists also said that the tight economic policy had little impact on the key factors behind inflation, such as rising costs of cross-border payments due to Western sanctions, increased prices for imported food, and hikes in regulated utilities tariffs.
“As a result of the central bank’s actions, the Russian economy is effectively facing the threat of stagflation—simultaneous stagnation or even recession and high inflation,” the think-tank said.
The central bank earlier argued that an overheated economy running above its capacity, along with labour shortages and uncontrolled wage growth created stagflation risks and could plunge the economy into recession.
(Reporting by Darya Korsunskaya, writing by Gleb Bryanski; Editing by Sharon Singleton)
