Russia’s inflation spike sets Kremlin and central bank on collision course

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Russia’s President Vladimir Putin (L) and Russian Central Bank Governor Elvira Nabiullina

Alexei NikolskyTASS via Getty Images

Russia’s rising inflation and plunging currency have spotlighted an emerging discord between the Kremlin and the country’s central bank.

The Central Bank of Russia (CBR) at an emergency meeting on Tuesday jacked up interest rates by 350 basis points to 12% in a bid to halt a rapid depreciation of the ruble currency, which slumped to a 17-month low of near 102 to the dollar on Monday.

The sudden move came after President Vladimir Putin’s economic advisor, Maxim Oreshkin, penned an op-ed arguing that a recent acceleration of inflation and the sinking currency were the result of “loose monetary policy” and that the central bank “has all the necessary tools to normalize the situation.”

The Bank said its emergency rate hike on Tuesday was aimed at “limiting price stability risks” as “inflationary pressure is building up,” with current price growth over the last three months averaging an annualized 7.6% on a seasonally adjusted basis and core inflation over the same period rising to 7.1%.

“Steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has impact on the ruble’s exchange rate dynamics through elevated demand for imports,” the central bank’s board said.

Last week, the central bank had halted foreign currency purchases on the domestic market until 2024 to reduce volatility, but this failed to arrest the ruble’s decline. Russia often sells foreign currency to offset falls in oil and gas export revenues, and buys if it is running a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia blamed the country’s shrinking balance of trade for the inflation and currency frailties, as Russia’s current account surplus fell more than 85% year on year from January to July.

Anatoly Aksakov, chairman of the Duma Committee on Financial Markets, said on Telegram on Monday that “the…

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