Russia’s Central Bank on Friday raised its key interest rate by two percentage points to 15 percent, a larger increase than expected as the bank stated it was attempting to reduce persistently high inflation.
The central bank, which projected an annual inflation rate of 7 to 7.5 percent for this year, anticipated a prolonged period of “tight monetary conditions” in order to bring the rate closer to its target of 4 percent.
The bank stated that “steadily rising domestic demand” was driving price pressures, brought on by the Kremlin’s decision to inject more money into the economy due to the conflict in Ukraine.
The bank acknowledged that the surge in spending “is increasingly exceeding the capabilities to expand the production of goods and the provision of services.”
During a news conference on Friday, Elvira Nabiullina, the head of the Central Bank, cited increased government spending as one of the reasons for the interest rate hike. Russia’s defense budget has more than tripled since the invasion of Ukraine last year and is expected to reach nearly a third of the government’s spending next year.
Despite facing sanctions aimed at punishing it for the invasion, Russia managed to weather the immediate storm. However, the restrictions severely limited its profitable trade with Western countries and largely isolated it from the global financial system.
As Russia continues to spend large amounts on its war efforts, its industrial production and labor markets struggle to keep up with the increased demand, resulting in higher inflation and significant levels of borrowing.
Yevgeny Nadorshin, the chief economist at the PF Capital consulting company in Moscow, expressed concern that the central bank’s attempt to slow the economy by raising interest rates could stifle the country’s growth.
“We are currently at a point where growth is turning into a recession,” said Mr. Nadorshin.
He highlighted the rapid expansion of Russia’s mortgage and consumer borrowing markets.
“People are still worried about the economy, but they feel that things are better than expected at the moment,” said Mr. Nadorshin in a phone interview. “People see this as a short period of opportunity.”
However, Dmitri Polevoy, an economist in Moscow, stated that he does not see major risks for the Russian economy despite the high interest rates.
“This issue is solely about inflation,” said Mr. Polevoy. “Considering the current budgetary policy and external conditions, the risk of a recession is low.”
After experiencing a decline following the invasion of Ukraine, the Russian economy has returned to growth. The International Monetary Fund recently projected a 2.2 percent increase in economic output for this year, as Russia’s oil exports have managed to evade Western sanctions and find new customers in India, China, and other countries.
Additionally, the country has been able to import Western goods from former Soviet republics, as well as Turkey and Gulf States. Russian businesses, including banks, have also adapted and serviced needs since the departure of many Western companies.
