The Central Bank of Russia has decided to raise interest rates from 12% to 13% in response to mounting concerns of an inflationary spiral affecting the country’s economy.
This marks the second interest rate increase in two months, following an emergency meeting held in August when the Russian ruble dropped below 100 against the US dollar.
While the ruble has since slightly recovered, it has remained below this crucial threshold, which is seen as an indicator of the economic well-being by many Russians.
A depreciating currency results in higher prices for goods that rely on imported components, exacerbated by labor shortages driving up wages, creating additional inflationary pressures.
The Central Bank stated, “Inflationary pressures in the Russian economy remain high,” emphasizing that domestic demand is increasing at a faster pace than the country’s capacity to produce new goods.
The Bank reported that inflation is currently at 5.5%, exceeding its target rate of 4%.
It also revealed that the devaluation of the ruble has contributed to a 9.9% rise in prices on a seasonally adjusted basis, reflecting the fact that prices for certain goods, like fruits and vegetables, typically decrease during the summer months.
The Central Bank further stated that it may increase interest rates again in the future if inflation persists.
Economists generally agree that Russia’s economy is overheating, partly due to a significant increase in government spending to finance its invasion of Ukraine.
Since February 2022, the economy has undergone extensive militarization, with resources and manpower redirected towards the production of tanks, missiles, guns, and ammunition.
Increasing interest rates is an attempt to reduce economic activity by raising borrowing costs and promoting saving.
However, some independent analysts argue that rate hikes may have less impact since a substantial portion of Russia’s economy is driven by government expenditure on the war.
Mikhail Zeltser, an analyst at BCS Investments, stated, “A month after the previous increase, we still see inflation accelerating and a weakened ruble,” predicting that the interest rate of 13% will be maintained in the foreseeable future.
Zeltser added, “The Central Bank has demonstrated its decisiveness, and it must succeed.”
The Bank’s Governor, Elvira Nabiullina, will hold a press conference at 3:00 p.m. Moscow time to provide further insight into the Bank’s decision.
