Russia’s central bank has announced a sharp hike in key interest rates to curb soaring inflation and an overheating economy following President Vladimir Putin’s all-out invasion, and the country’s economic growth is expected to slow.
The Russian central bank raised the interest rate at which other banks could borrow from 16% to 18%, not far from the 20% announced at the start of the war, and the bank’s governor, Elvira Nabiullina, did not rule out further hikes.
Nabiullina has steered Russia’s economy through turmoil caused by Western sanctions aimed at containing President Putin’s military power. Newsweek has reached out to the Russian central bank for comment.
The Kremlin boasts of a 2.9% GDP growth forecast for this year, fueled by record military spending on the war. Massive troop losses and an exodus of draft dodgers have created a labor shortage, accelerating wages and inflation as further macroeconomic hardship looms over the coming years.
In this 2017 photo, Russian President Vladimir Putin and Central Bank Governor Elvira Nabiullina announce that the country will raise its key interest rate to 18 percent from 16 percent to cool an economy overheated by increased government spending following Putin’s invasion of Ukraine. Read more
“Inflationary risks from sanctions are materializing,” he said at a press conference on Friday, adding that a “further tightening of monetary policy” was needed to contain the current inflation rate of 8.6 percent year-on-year.
“Inflation showed signs of getting out of control, forcing them to abandon their initial plans to start cutting interest rates later this year,” Bartosz Sawicki, a market analyst at Konotokia Fintech, told Newsweek.
“Instead, monetary policy needed to be tightened further to cool an overheated wartime economy,” he said. “Military spending, at about 7 percent of GDP, created serious macroeconomic imbalances that are beginning to have adverse effects.”
Nabiullina predicted that Russia’s GDP will grow by 4% this year, but will fall to a maximum of 1.5% in 2025, and to 0.5% in the most pessimistic scenario – eight times slower than the 2024 forecast.
“The economy remains significantly overheated,” she said, adding that spare labour and production capacity is “all but depleted.”
These factors mean that growth is likely to slow despite any attempts to stimulate demand. “This increase will only lead to more inflation,” she said. “This is in fact a stagflation scenario that can only be thwarted by a deep recession.”
Stagflation is the simultaneous occurrence of slow growth, high unemployment and rising prices, and he said Friday’s measures “will help prevent that scenario.”
Consumer price inflation (CPI) has risen for six consecutive months, and Sawicki said the bank’s goal of reducing it to 4% by the end of next year was “at risk from rising cross-border payment costs due to international sanctions and rising fuel prices.”
“This could be partly due to the Ukrainian drone attack that shut down an oil refinery,” he added, referring to Kiev’s stepped up attacks on infrastructure for Russia’s main exports.
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