With The Fed In Denial, Hawkish Bank Of Russia Sees Inflation "Not Transitory", Warns Of Possible Shock-And-Awe Rate-Hike

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by Tyler Durden
Tuesday, Jun 29, 2021 - 08:05 PM

Authored by Wolf Richter via,

US Inflation is almost as hot as in Russia, but the Fed is still blowing it off...

Consumer price inflation in Russia is red-hot, having jumped 6.0% in May compared to a year ago, 2 percentage points above the Bank of Russia’s target of 4.0%.

Polls in Russia show that food inflation is a top concern, currently running at 7.4%.

But inflation in the US isn’t lagging far behind: The Consumer Price Index (CPI) jumped 5.0% in May.

Yet the central banks are on opposite tracks in their approach to inflation.

Federal Reserve governors keep jabbering about this red-hot inflation being “temporary” or “transitory,” and likely to disappear on its own despite huge government stimulus and the Fed’s huge and ongoing monetary stimulus, though some doubts are creeping in among a couple of them. So they’ll keep interest rates at near-zero until at least next year, and they’re still buying $120 billion a month in securities to push down long-term interest rates.

Russia has been on the opposite trajectory, “surprising” economists at every step along the way. This trajectory started on March 19 with a 25 basis point rate hike, to 4.5%, against the expectations of 27 of the 28 economists polled by Reuters, who didn’t expect a rate hike. On April 23, the Bank of Russia hiked its policy rate by 50 basis points, to 5.0%. On June 11, it hiked by another 50 basis points to 5.5%. The next policy meeting is scheduled for July 23.

Is a shock-and-awe rate hike next? Bank of Russia Governor Elvira Nabiullina is preparing the markets for this possibility – so it won’t be a shock, but just awe.

At the July meeting, the central bank “will consider” an increase in the range from “25 basis points to 1 percentage point,” she told Bloomberg TV in an interview.

“We see that inflation remains elevated” and that “inflation expectations are quite high,” she said.

The initial factors in this surge of inflation were the weakening ruble last year and commodity and food price increases. They alone might not require a monetary policy intervention, she said.

But now inflation expectations remain elevated, which creates second-round effects, she said.

“That’s why we see that inflation acceleration is not transitory, as in many other countries, but more persistent,” she said. “That’s why we think we should act with rate hikes.”

“We signaled to the markets [at the last meeting] that further policy rate increases can be necessary to curb inflation, and now we see it is warranted,” she said.

The economy has recovered quite fast, she said. Demand growth has been outpacing supply growth. And this gap creates additional inflation pressures, and in combination with elevated inflation expectations provide us the need to neutralize our monetary policy, she said.

“Now policy is still accommodative, if we compare the policy rate [5.5%] with the current inflation rate [6.0%] and with inflation expectations,” she said.

This is the school of thought that negative real interest rates – interest rates below the rate of inflation – are accommodative, or stimulative for the economy. Under this theory for the US, a neutral monetary policy would be with the Fed’s policy rates at least at 3.4% if based on core PCE and at 5.0% if based on CPI.

Nabiullina said that the magnitude of the rate hikes and the trajectory will depend a lot on the incoming data “because there are a lot of uncertainties now.”

The Bank of Russia wants to “prevent the accumulation of inflationary risks,” but it also wants the moves to be “predictable” for the markets because sharp unexpected increases of rates can create some difficulties for markets to adapt, she said.

Hence, the interview with Bloomberg TV. She’s clearly trying to prepare the markets for a hefty rate hike in July, perhaps a Brazilian-type rate hike of 75 basis points, or even a shock-and-awe full percentage point, while the Fed will continue to cling to its doctrine of the moment that this red-hot inflation in the US is just transitory and will dissipate on its own.

There are whole generations who never experienced this type of inflation, this type of destruction of the dollar’s purchasing power.

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