Russian central bank raises key interest rate to 15%

Russian central bank to resume currency trades in 2024
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Russia’s central bank on Friday raised its key interest rate from 13 percent to 15 percent as it warned inflation was rising across the Russian economy.

It is the fourth hike in as many months as the central bank tries to grapple with the economic fallout of Moscow’s assault on Ukraine.

“Current inflationary pressures have significantly increased to a level above the Bank of Russia’s expectations,” the central bank said in a statement announcing the rate rise.

A surge in government military spending and the call-up of hundreds of thousands of soldiers has caused the domestic economy to show signs of overheating.

The central bank said annual inflation was running at 6.6 percent — above its official 4 percent target — and was continuing to rise.

Higher interest rates are designed to sap demand by making it more expensive to borrow money and encouraging consumers and businesses to save, not spend.

The bank said it saw a “substantial” risk that prices would continue to rise in the months ahead.

“The central bank has aggressively raised its key rate … This is a tougher move than the market expected,” analysts at Moscow-based Alfa Bank said in a research note.

The Russian ruble strengthened slightly on the decision to around 93 to the US dollar.

The exchange rate is seen as a key barometer of Russia’s economic health by politicians, businesses and the population.

While Moscow has defied early predictions that its assault on Ukraine and the resulting Western sanctions could trigger a near economic collapse, the offensive has still put a strain on the domestic economy.

A rapid rise in military spending has pushed the government into a deficit, while record-low unemployment has created a cycle of rising wages and prices.

The central bank pointed to higher government spending as a major factor pushing up inflation in its statement Friday.

“We think that inflation pressures will continue to build in the coming months and that another rate hike next year still looks likely,” said Capital Economics’ senior emerging markets economist Liam Peach.

Russian lawmakers on Thursday gave preliminary backing to a record increase in military spending next year, in proposals for the country’s 2024-2026 state budget.

Defence spending is set to climb 68 percent in 2024 and will account for a post-Soviet record of more than 6 percent of Russia’s GDP.


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