The Russian central bank has raised concerns over inflation due to a decreasing ruble and record labor shortages. Despite keeping rates on hold on Friday, policymakers hinted that a rate hike could come soon. The central bank cut interest rates last year as inflation cooled, but its new forecast expects inflation to increase from 3.5% to 6.5% by the end of the year due to accelerated fiscal spending, deteriorating foreign trade conditions, and labor market conditions. Meanwhile, the ruble has depreciated by about 14% against the dollar by 2023, which raises the prices of imported goods and fuels inflation. President Vladimir Putin’s war on Ukraine led to record labor shortages as the military mobilized 300,000 troops last year, and hundreds of thousands more are set to deploy this year. It is estimated that 1.3 million young workers left the workforce last year due to the war, leading to a noticeable decline in Russian industrial production.
At a press conference, Governor Elvira Nabiullina stated that the option of a rate hike was considered, but the consensus was to keep rates unchanged while strengthening signals. Central bankers have discussed a rate hike of 25 to 75 basis points despite policymakers keeping the benchmark rate unchanged at 7.5%, the first since September. Inflation risks continue to tip further towards the upside, aggravating the issue of a decreasing ruble and labor shortages in Russia. The country is shifting towards an all-out economy, and Ukraine’s newly launched counteroffensive indicates increased defense spending by the Kremlin. The ruble also hit a two-month low on Friday, topping 83 rubles to the dollar.