WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Despite sharp monetary policy tightening in H2 2024, inflation climbed to 9.5% by year end, fuelled by a tight labour market (unemployment had plunged to 2.3% by November) and the threat of US secondary sanctions on banks from third countries, making import payment schemes more elaborate and imported goods more expensive. On top of that, the US sanctions on Russia’s Gazprombank imposed in November triggered rouble depreciation of about 10%, further adding to inflation via higher import costs. However, with the policy rate already standing at 21%, the central bank had been facing increased criticism and, at its latest meeting in December, opted to put the tightening cycle on hold. Indeed, the latest high-frequency data suggest that the earlier policy tightening had in fact been effective in terms of curbing demand for credit and boosting household saving propensity, resulting in near-stagnation of consumer demand (on a monthly basis) by year end, with investments likely to follow suit. These trends are likely to persist into 2025 – even if no further policy tightening takes place. On the external front, near-term export prospects appear bleak. Gas transit via Ukraine ceased on 1 January, and on 10 January the outgoing US administration imposed the toughest sanctions yet on the Russian energy sector, including oil producers Surgutneftegaz and Gazpromneft and 183 vessels believed to be part of the Russian ‘shadow fleet’. All in all, an imminent growth slowdown looks unavoidable: from an estimated 3.8% in 2024 to 1.5-2% in 2025-2027. This should contribute to gradual disinflation, thereby allowing monetary policy relaxation – although in real terms, interest rates will likely stay robustly positive until the end of the forecast horizon.