Russia’s central bank kept borrowing costs at a decade-long high on Friday to combat rampant inflation, even as banks and businesses warn of a slowdown.
Prices in the Russian economy have been rising rapidly for months, driven by large-scale government spending in Ukraine conflict and labor shortages.
Meanwhile, the shocking loan rates are hard to hit, with some of the country’s top corporate leaders putting pressure on central banks to relax rates.
Russia’s central bank acknowledged in a statement announcing the tax rate decision that lending activity was “submission” but inflation with operating rates above 10% remains too high.
Russia has inflation at 4%, but price increases are expected to reach that level until 2026, with an average of between 7-8% in 2025.
“Russian banks will maintain monetary conditions under the necessary conditions to return inflation to targets by 2026,” the bank said.
In a video call with bank governor Elvira Nabiullina and cabinet officials on Thursday, President Vladimir Putin admitted that inflation is too high and Russia’s economic growth will be “slightly lower” in 2025.
But he said it was part of a “soft landing” that Russia actually “worked”.
Economists warn that Russia’s economic activity will slow down, oil prices fall, high interest rates and a downturn in manufacturing, all of which will lead to headwinds.
Russian lender Raiffeisenbank said in a March research note that confidence in manufacturing “has been greatly reduced in the past few months” and oil production has slowed down.
Russia reported that economic growth was large in 2024, largely due to the huge increase in national defense spending, which will increase by 30% again in 2025.
But economists warn that defense industry-driven growth is unsustainable and does not reflect real productivity gains.
Analysts say that because the large spending state is instructing responds less to higher borrowing costs, rising interest rates may also not be an effective tool to reduce inflation.
bur/rl
