The Central Bank of Russia has unleashed a major move by raising interest rates to 19%!

After raising rates by 200 basis points in July, the Central Bank of Russia recently announced another 100 basis point increase, bringing the benchmark interest rate up to 19.00%.

With skyrocketing housing prices and surging inflation, the Central Bank of Russia continues to tighten liquidity.

Despite being at war, why are housing prices in Russia soaring?

Why is the inflation problem getting worse despite continuous interest rate hikes?

Can the Russian economy still hold up?

Today, we will discuss these issues.

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The main reason for the Central Bank of Russia's interest rate hike is the continuous increase in inflationary pressure.

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According to the inflation data from the Russian Federal State Statistics Service, in July this year, the consumer price index for Russian residents rose by 1.14% month-on-month, an increase of 0.5 percentage points compared to June.

At the same time, after seasonal adjustment, the annualized price increase rose from 8.59% in June to 9.13% in July.

This means that the inflationary pressure in Russia has not been alleviated, and there is no downward trend.

In response, the Central Bank of Russia has indicated that it may further tighten monetary policy to ensure that the inflation rate can be reduced to 4.0% to 4.5% by 2025, closer to the target level of 4%.

Despite the ongoing conflict between Russia and Ukraine, not only have Russian housing prices not collapsed, but they have also soared.

Relevant statistical data show that in the past three years, housing prices in major Russian cities have risen by 172%.

Particularly in cities far from the Russia-Ukraine border, such as Moscow and St. Petersburg, prices have skyrocketed.

Now, the housing price in Moscow has soared to 320,000 rubles (approximately 27,000 RMB) per square meter, and St. Petersburg is at 240,000 rubles (approximately 20,000 RMB) per square meter, which is more than half higher compared to before the conflict.

Why are housing prices in Russia soaring?

In the final analysis, it is due to inflation.

In the past, many Russians believed that taking out a loan meant becoming a "slave to debt," so they would rather rent than take out a mortgage to buy a house.

However, as the war continues and inflation arrives, the "last straw" that overwhelms Russians has come.

On the one hand, continuous high inflation, a lack of investment channels, and the constant rise in housing prices have attracted countless Russians to buy homes, heating up the market.

Last year, Russian banks issued a total of 2 million mortgage loans, valued at 7.8 trillion rubles, an increase of 60% year-on-year.

On the other hand, Russia itself also hopes to use real estate to stimulate the economy.

Under the significant devaluation of the ruble, asset prices have been further pushed up.

It is against this backdrop that the Central Bank of Russia has raised interest rates to 19% and has not ruled out the possibility of further increases.

Some may wonder: both the Federal Reserve and the Central Bank of Russia are raising interest rates, and the Central Bank of Russia has a larger increase, but why is it that inflation in the United States is gradually falling while inflation in Russia is setting new records?

There are two main reasons.

First, Russia's import costs have increased significantly, leading to severe imported inflation.

Due to limited manufacturing capabilities, most consumer goods in Russia need to be imported.

However, with the outbreak of the conflict and Western economic sanctions, Russia's imports have been greatly restricted.

Coupled with the devaluation of the ruble, Russia's import costs continue to increase, and commodity prices will naturally rise.

At the same time, even if there are countries willing to trade with Russia, due to Russia being expelled from the SWIFT settlement system, even settlement is extremely difficult, and the handling fees are also getting higher, which will also lead to increased import costs and imported inflation.

Secondly, Russia's aggressive interest rate hikes have created a vicious cycle.

This may seem counterintuitive: the Central Bank of Russia's intention to raise interest rates is to reduce inflation, but under the skyrocketing interest rates, it has further increased the various costs of consumer goods, bringing greater inflationary pressure.

The reason is that the source of Russia's inflation is the decline in production and import of basic necessities, leading to insufficient supply, and the demand elasticity for necessities is relatively small, with very little impact from interest rates.

After all, people cannot stop eating because food prices rise, but the increase in prices due to interest rate increases, which in turn brings greater inflationary pressure, is a reality.

Therefore, despite the continuous interest rate hikes by the Central Bank of Russia, inflation has not decreased but has increased, failing to achieve the expected effect.

This year, Russia has set its inflation target at 4%, but under continuous interest rate hikes, it is getting further away from the target.

The double impact of inflation and interest rate hikes poses a danger to the Russian economy.

With an ultra-high interest rate of 19%, corporate financial costs are also exorbitantly high.

However, the burden ultimately falls on the consumer.

From this perspective, it seems that Russia is on a one-way street, caught in a vicious cycle.

At first glance, Russia's economic growth rate reached 4.4% in the second quarter, which is impressive.

But in reality, as the war continues, Russia is forced to concentrate more and more funds, materials, and manpower on the military industry, and the civilian industry is facing labor shortages and other issues, affecting people's lives.

In this distorted war economy, although the Russian economy does not look bad, it is not sustainable in the long term.

Moreover, from the perspective of inflation, because a large amount of resources are tilted towards the military field, it further leads to a decline in consumer goods production capacity, more severe supply shortages, and intensified inflation.

Although the Central Bank of Russia has stated that it will reduce the inflation rate from the current 9.1% to 4% by 2025, it is a pity that interest rate hikes alone may not be effective.

Perhaps, as Russian economists have said, excessive interest rate hikes may lead to a recession in the Russian economy.

In conclusion, behind the soaring housing prices and surging inflation lies the precarious Russian economy.

Under continuous interest rate hikes, Russia's inflation has become more severe, and the problem is more challenging than imagined.