Russia’s Central Bank raised its key interest rate by two percentage points to 15 percent on Friday, a bigger increase than expected as the bank said it was trying to reduce extremely high inflation.
The central bank, which said the annual inflation rate will range between 7 and 7.5 percent this year, predicted a longer period of “tight monetary conditions” to bring the rate closer to its 4 percent target.
The bank said the pressure on prices is due to “continued rising domestic demand”. statement ofDriven by the Kremlin’s decision to inject more money into the economy while fighting the war in Ukraine.
“Expenditure increases are exceeding capabilities to expand the production of goods and the provision of services,” the bank said.
At a press conference on Friday, Central Bank head Elvira Nabiullina said an increase in government spending was one of the reasons for the interest rate increase. Russia’s defense budget has more than tripled since last year’s invasion of Ukraine, and it is set to reach nearly a third of government spending next year.
Russia was largely successful in weathering the immediate storm caused by sanctions aimed at punishing the invasion. restrictions It greatly reduced its lucrative trade with Western countries and largely isolated it from the global financial system.
But as Russia spends heavily on its war machine, its industrial production and labor market are unable to meet the increased demand, resulting in high inflation and high levels of borrowing.
Yevgeny Nadorshin, chief economist at PF Capital consulting company in Moscow, said the central bank’s efforts to slow the economy by raising interest rates “could suffocate the country’s growth.”
“We are at a moment when growth is turning into recession,” Mr. Nadorshin said.
He pointed to Russia’s mortgage and consumer lending markets, which have experienced rapid expansion.
“People are still stressed about the economy, but they feel things are better than expected right now,” Mr. Nadorshin said in a phone interview. “People think this is a short period that they should take advantage of.”
But Dmitry Polevoy, a economist In Moscow he said that despite high interest rates he did not see any major risks to the Russian economy.
“This story is specifically about inflation,” Mr. Polevoy said in written comments to questions asked via a messaging service. “Under the current budgetary policy and similar external circumstances,” he said, “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 estimated that economic output would grow 2.2 percent this year, as oil exports have largely escaped Western sanctions and found new customers in India, China and other countries.
The country has been able to import Western goods from some former Soviet republics as well as Turkey and the Gulf states. Russian businesses, including banks, have also adapted to meet needs since the departure of many Western companies.