June 9, 2024, Moscow, Russia: The Kremlin guardhouse (left) and the Ministry of Foreign Affairs (center background) highlight the heart of the capital. Photo: Ulf Mauder/dpa (Photo by Ulf Mauder/picture Alliance via Getty Images)
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On Friday, Russia’s central bank elevated its main interest rate by 200 basis points to 21%, citing ongoing inflation risks in the medium term due to a quicker-than-anticipated surge in consumer prices.
This adjustment follows a more gradual increase in September, where the key interest rate was raised by 100 basis points to 19%.
Friday’s decision significantly surpassed analysts’ predictions of a 100-basis-point increment, marking the highest benchmark interest rate since February 2003, as reported by Reuters. The last comparable rate was in February 2022 when authorities raised it to 20% in an effort to stabilize local markets soon after the onset of the war in Ukraine.
Adopting a hawkish approach, Russian Central Bank Governor Elvira Nabiullina mentioned at a post-decision press conference that there would be considerations to lift the base interest rate beyond 21%. He indicated intentions to possibly increase the rate again at the next meeting in December, according to reports from TASS, a Russian state news agency.
Adjusted for seasonal variations, annual inflation hit an average of 9.8% in September, rising from 7.5% in August. The bank now anticipates inflation to be between 8.0% and 8.5% by the end of 2024, which is notably higher than the earlier forecast of approximately 6.5% to 7.0% made in July.
The central bank stated, “In the medium term, inflation risks are heavily skewed towards the upside.” The statement identified key threats, including persistently high inflation expectations, deviations in economic growth from the desired balance, and worsening foreign trade conditions.
Looking ahead, the bank expects annual inflation to decline to around 4.5%-5.0% in 2025 and to approximately 4.0% by 2026.
Challenges for the Russian economy stem from low global prices of its primary oil exports and Western sanctions that limit trade and have led to a decline in the value of the ruble, aiming to strain the Kremlin’s finances amidst the ongoing conflict in Ukraine. As of 12:52 PM London time, the US dollar gained 0.36% against the ruble.
The increase in Russia’s interest rates occurs while the European Central Bank and the US Federal Reserve are implementing easing measures, raising concerns over potential limitations on Russia’s economic growth.
The International Monetary Fund (IMF) forecasts an average inflation rate of 7.9% for Russia this year and predicts a GDP decrease from 3.6% this year to 1.3% by 2025, citing a downturn in consumer spending and investment as the economic landscape stabilizes. Moreover, the labor market and wage growth are experiencing a slowdown.
