Russia’s central bank held its key interest rate at 21% on Friday as it locked in two decades of borrowing costs with increasing inflation.
Prices in the Russian economy have been rising rapidly for months, driven by huge government spending on Ukraine’s conflict and labor shortages.
For the first time last month, inflation exceeded 10% for the first time in two years, and prices are expected to average 7% to 8% this year.
“The current inflationary pressure has eased, but it is still high,” the central bank said in a statement.
It added that achieving its inflation target of 4% would “take a long period of time to maintain strict monetary conditions in the economy”.
Policymakers raised key interest rates to 21% in October despite complaints from businesses and banks that high borrowing costs hurt economic growth.
In January, the Moscow-based economic research group CMASF warned that Russia faces a “massive surge in corporate bankruptcy” due to high interest rates.
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.
Spending is swollen, and the size of the Russian economy partially offsets the impact of Western sanctions, but economists warn that this is unsustainable and does not reflect a real increase in productivity.
Analysts say rising interest rates may not be an effective tool to reduce inflation, as the country is guiding a large amount of spending, which responds less to higher borrowing costs.
Russian President Vladimir Putin told business leaders on Tuesday that a cooling of the Russian economy was “inevitable” but warned policymakers that should happen gradually.
“We have to be very cautious,” Putin said. “So, there is no over-cooling, just like in a freezer.”
Bur/BC
