Russian economy slumps amid record high interest rates, rising inflation

Russia is facing the looming threat of stagflation, a scenario where both high inflation and economic stagnation coexist, according to a government-linked think tank.

TsMAKP, a Russian research organization, criticized the central bank's tight monetary policy, warning that continued high interest rates could trigger an economic downturn. With inflation remaining high, Russia is at risk of entering a prolonged period of stagnation, which could exacerbate the country's economic difficulties, Caliber.Az reports via foreign media.

Stagflation is particularly problematic for central banks, as it makes traditional economic tools less effective. While central banks typically cut interest rates during a recession to spur growth, this option is unavailable when inflation is rising. In such cases, interest rates must stay elevated to control price increases, leaving policymakers with limited options.

The Russian central bank has already acknowledged the danger of stagflation, noting that inflation has remained high despite a decline in domestic demand. As a response, the bank raised its key interest rate to a record 21% in October, with indications that further hikes could follow. Despite these measures, inflation remains stubbornly high, with the rate reaching 8.63% in September and 8.54% in October. Food prices, particularly for staples like potatoes, have seen dramatic increases, with prices up 64% as of early November.

Business leaders in Russia are expressing concern over the impact of high interest rates on profitability. Sergei Chemezov, the CEO of defence conglomerate Rostec, warned that these rates are pushing businesses towards bankruptcy and threatening national economic stability. TsMAKP echoed this sentiment, predicting that continued high rates could lead to a collapse in investments and a deeper economic downturn.

The Russian economy is already showing signs of weakness, with GDP contracting by 3.1% year-on-year in the most recent quarter. Analysts at Capital Economics predict that GDP growth will continue to slow as the ongoing war and tightening monetary policy weigh on economic activity. With inflation expected to remain high, the central bank is likely to raise interest rates further, with predictions that the key rate could reach 22% next month.