Russia’s central bank on Friday implemented a significant interest rate hike of 200 basis points, raising the key rate to 21%.
This marks the highest rate since the early years of President Vladimir Putin’s administration, a time characterized by the nation’s recovery from the tumultuous aftermath of the Soviet Union’s collapse.
This decisive move was largely driven by substantial increases in state spending, particularly in the military sector, and pushes the interest rate above the levels observed during the market turmoil that accompanied the onset of Russia’s “special military operation” in Ukraine in February 2022.
In a statement, the central bank emphasized the necessity of this increase to combat inflation, which currently stands at 8.4%.
The bank noted that inflationary expectations among the populace have surged to their highest point since the beginning of the year.
“Further tightening of monetary policy is required to ensure that inflation returns to target and to reduce inflation expectations,” the regulator stated.
Among the core BRICS nations—China, India, Brazil, and South Africa—Russia now possesses the highest key interest rate.
The central bank indicated that another rate hike could be forthcoming at its next policy meeting and updated its inflation forecast for 2025 to a range of 4.5-5.0%, suggesting that achieving the 4% target for next year is unlikely.
Economist Evgeny Kogan described the decision as “a capitulation in the face of inflation,” pointing out the bank’s acknowledgment that returning inflation to target will not be feasible in the near future.
Furthermore, the central bank’s projections for the average key rate in 2024 imply potential for an increase to 23% before the end of the year.
Central Bank Governor, Elvira Nabiullina, stated during a news conference that there were “no limits” for the key rate level, underscoring the possibility of further tightening.
Most analysts surveyed by Reuters had anticipated a smaller increase of 100 basis points. The central bank took into consideration the newly drafted budget, which is viewed as inflationary due to a projected deficit of 1.7% of GDP for this year and substantial hikes in utility tariffs.
This new benchmark rate, the highest since the introduction of the key rate in 2013, replaces the refinancing rate as the primary indicator for the market.
Following Putin’s ascension to power in 2000, he initiated economic reforms aimed at stabilizing the economy after the 1998 financial crisis, which had allowed the central bank to lower the refinancing rate below 20% in February 2003 and maintain it there for many years.
The ongoing depreciation of the Russian ruble, with the official exchange rate against the U.S. dollar plummeting over 12% since early August, has been identified by analysts as a contributing factor to rising inflation.
The interest rate hike also serves as a signal of political backing for the central bank’s leadership, which has encountered extraordinary pressure from influential business leaders, including heads of major oil and defense corporations, urging a halt to the tightening cycle. However, official statistics reveal that corporate lending has continued unabated, despite the rising rates.
The International Monetary Fund recently curtailed its mission to Russia amid protests from several European countries and adjusted its forecast for Russian economic growth downwards by 0.2 percentage points, projecting a growth rate of 1.3% in 2025, down from an anticipated 3.6% for this year.
The IMF cited a slowdown in consumption and investment growth, attributing this to a less constrained labor market and tempered wage growth. Its projections are based on the assumption that the central bank will maintain its strict monetary policy stance.
Both the IMF and the central bank described the current state of Russia’s economy as “overheated.” Official government estimates suggest that economic growth will decelerate to 2.5%, a decline from the expected 3.9% for this year.
In February 2022, the central bank raised the interest rate to 20% to stabilize markets shaken by Russia’s military actions in Ukraine and to curb capital flight.
Subsequently, the rate was reduced to 17% in April 2022 as the economy navigated the ongoing challenges.
