In a decisive move to tackle rampant inflation, the Bank of Russia has raised its key interest rate by 200 basis points to 18% per annum.
This bold decision, marking the sixth rate hike in just over a year, underscores the central bank’s commitment to curbing the economic impact of the ongoing conflict in Ukraine.
Russia’s war economy fueling inflation
Since Russia’s large-scale military engagement began in February 2022, inflation has surged well beyond initial forecasts.
President Vladimir Putin’s announcement of allocating nearly 9% of Russia’s GDP to defense and security—an expenditure level reminiscent of the Soviet era—has intensified economic pressures.
Rising salaries and increased spending have further fueled inflation, prompting this substantial monetary policy adjustment.
“Consumer activity remains high amid a significant increase in households’ incomes and positive consumer sentiment. Substantial investment demand is supported by both fiscal incentives and high profits of businesses. The significant upward deviation of the Russian economy from a balanced growth path is not decreasing,” the bank said in a statement.
However, it added that labor shortages continue to grow.
“In these conditions, the growth in domestic demand does not result in a proportional expansion of the supply of goods and services but rather increases the costs of businesses and, consequently, intensifies inflationary pressures”
Bank of Russia
According to Financial Times, as the war has dragged on, rising salaries in a booming wartime defense industry have forced civilian businesses to follow suit in order to attract workers at a time of acute labor shortages. The result is that Russia has unexpectedly found itself in the midst of a consumer spending boom.
Real wages have grown by almost 14%, and the consumption of goods and services by around 25%, according to Rosstat, the Russian state statistics agency.
Central bank revises inflation forecasts
In line with the persistent and growing inflationary pressured within the economy, the central bank also revised its inflation forecast for 2024, increasing it to 6.5-7%.
According to the bank’s projections, annual inflation is expected to decline to 4.0-4.5% in 2025, stabilizing at around 4% in subsequent years.
The central bank said that over the medium-term horizon, balance of inflation risks is still tilted to the upside.
“The key proinflationary risks are associated with changes in terms of trade (including as a result of geopolitical tensions), persistently high inflation expectations and an upward deviation of the Russian economy from the balanced growth path,” it said.
Commenting on the role the war is playing in pushing up inflationary tendencies in the country, Sergei Guriev, a Russian economist who is the incoming dean of London Business School, told Dow Jones:
“If you produce a new tank, and that tank is burned in Ukraine, it’s equivalent to injecting cash into the economy without producing anything. It’s very inflationary.”
Konstantin Sonin, John Dewey Distinguished Service Professor at Harris School of Public Policy, University of Chicago, said on X:
“The Russian Central Bank raised its key rate to 18%. With annualized inflation at 9% (and the inflation target at 4%), this points out to high inflation expectations. Also, the role of the key rate gradually goes down as more and more credits are extended to defense industry at sub-market rates.”
The post Bank of Russia raises key interest rate by 200bps to 18% to combat war-driven inflation appeared first on Invezz
