MOSCOW (AP) — Russia’s central bank on Friday raised its key interest rate by two percentage points to a record high of 21% in an effort to stem rising inflation as massive government spending on the military during the fighting in Ukraine crimps ability of the economy to survive. produce goods and services and drive up workers’ wages.
The central bank said in a statement that “domestic demand growth continues to significantly exceed the scope for expanding the supply of goods and services.” Inflation, the statement said, “is significantly higher than the Bank of Russia’s July forecast” and “inflation expectations continue to rise.” A prospect of further interest rate increases in December was offered.
The Russian economy continues to grow due to rising oil export revenues and an increase in government spending, most of which goes to the military as the conflict in Ukraine enters a third year. That has fueled inflation, which the central bank has tried to combat with higher interest rates that make it more expensive to borrow and spend on goods, theoretically easing pressure on prices.
Central Bank Governor Elvira Nabiullina said inflation is expected to double the bank’s annual target of 4%, stressing that the bank remains committed to bringing inflation back to target levels.
Nabiullina noted that inflation has exceeded targets due to increased government spending and relaxed banking regulations that are pushing commercial banks to offer more loans. Years of price growth that exceeded targets have led to high inflation expectations among consumers, she added.
“There is high inertia in inflation expectations as inflation has been above target for four years,” Nabiullina said. “The more inflation exceeds targets, the less people and businesses believe it can fall back to low levels.”
This is the highest policy rate in Russia since it was introduced in 2013 and effectively replaced the refinancing rate, a similar instrument. The previous high was in February 2022, when the central bank raised interest rates to a then-unprecedented 20% in a desperate bid to support the ruble in response to crippling Western sanctions that followed the Kremlin’s deployment of troops to Ukraine.
The Russian economy grew by 4.4% in the second quarter of 2024, while unemployment was low at 2.4%. Factories are largely running at full capacity and an increasing number of them are focusing on weapons and other military equipment. Domestic producers are also stepping in to fill the gaps left by a drop in imports, which have been hit by Western sanctions and the decisions of foreign companies to stop doing business in Russia.
