Russia’s Central Bank Raises Key Interest Rate to 18%

Russia’s Central Bank increased its key interest rate from 16% to 18% on Friday, in response to rising inflation driven by war spending and labour shortages. This is the sixth rate hike in just over a year, with the last increase occurring in December 2022.

The bank stated that inflation has accelerated beyond its April forecast, driven by domestic demand exceeding the supply of goods and services. As a result, the bank emphasised the need for tighter monetary policy to achieve its 4% inflation target.

Russia has revised its 2024 inflation forecast to 6.5-7%, with expectations of a decline to 4-4.5% in 2025. The rate hike comes as President Vladimir Putin announced defense and security spending will reach nearly 9% of GDP this year, the highest since the Soviet era.

Public expenditure and labour shortages have fueled an inflationary spiral, despite gradual interest rate increases over the past year. Russia’s federal budget has surged by almost 50% in three years, from 24.8 trillion rubles ($289 billion) in 2021 to a projected 36.6 trillion rubles ($427 billion) this year.

Analysts are skeptical about the effectiveness of rate hikes, given the state’s control over significant spending sectors. Consumer prices remain a sensitive issue in Russia, with memories of past economic instability still fresh.

The Kremlin expressed concern over high inflation and assured that measures are being taken to address the issue. The Central Bank will hold its next key rate meeting on September 13, without indicating if another rate hike is expected.