Russia’s central bank has warned that the country’s large-scale military draft could lead to higher inflation, as it opted to keep its key interest rate unchanged for the first time after months of successive cuts.
The Russian economy could face labour shortages and more inflationary pressure after Moscow launched a “partial mobilisation” for its armed forces last month. Since then, hundreds of thousands of men have been drafted, and similar numbers have fled the country.
“A new factor influencing price trends is partial mobilisation. In the coming months, it will have a disinflationary effect because of lower consumer demand,” central bank governor Elvira Nabiullina said on Friday. “Nonetheless, later on, it might start to have a pro-inflationary impact due to changes in the structure of the labour market and a shortage of some specialists.”
She noted, however, that it remained “difficult to assess all economic consequences of the shift in the structure of employment”.
“They will manifest themselves gradually through the adjustment in wages and a possible intensification of the transfer of labour force across industries and regions,” Nabiullina said.
The central bank chose to keep its benchmark rate unchanged at 7.5 per cent. The rate hold follows six consecutive cuts, which lowered rates from the emergency 20 per cent level set after Russia’s full-scale invasion of Ukraine in February.
Inflationary pressures weakened over the summer, offering policymakers the space to cut rates drastically. Nabiullina had indicated that the cycle of loosening was coming to an end after last month’s rate cut.
At 13.7 per cent, Russian inflation remains high. In the short term, the bank expects the factors pushing up prices to be outweighed by a dampening of consumer demand due to what it described as a “rise in overall uncertainty”.
In September, Russia began suffering significant losses of territory on the battlefield after a major Ukrainian counteroffensive. On September 30, Moscow raised the stakes in the war substantially by claiming to annex four regions of Ukraine as its own territory. It also brought the war home to Russians by launching a draft, described by the Kremlin as a “partial mobilisation”.
The central bank said its current forecast was for inflation to reach between 12 and 13 per cent by the end of 2022. It wants inflation to fall to 4 per cent by 2024.
Sanctions on Russia over its invasion of Ukraine could also dent exports and the rouble in turn, the central bank said, adding to the longer-term inflationary pressures.
Nabiullina was hit with sanctions in late September by the US as part of a package of measures intended to stiffen financial punishment of Moscow in the wake of its war in Ukraine.
“A further escalation of external trade and financial restrictions, fragmentation of the global economy and the financial system could lead to a sharper decline in the Russian economy’s potential,” the bank said in a statement. “Specifically, supply-side constraints may increase due to problems with the supply of equipment, slowly replenishing stocks of finished products, raw materials and components.”
Looking ahead, Nabiullina said the current signal given by the central bank was “neutral” and that “the further trajectory of the key rate, the direction of our monetary policy will depend on future data on the economy, inflation, [and] inflation expectations”.
The central bank also upgraded its forecast of Russia’s gross domestic product, expecting the economy to contract by between 3 and 3.5 per cent this year. Previously, it had forecast a decline of up to 6 per cent.