Russia’s Central Bank Raises Rates to 15 Percent to Curb Inflation

Russia’s Central Bank on Friday raised its key interest rate by two percentage points to 15 percent, a bigger increase than expected as the bank said it was trying to bring down stubbornly high inflation.

The central bank, which said the annual inflation rate would range from 7 to 7.5 percent this year, predicted a long period of “tight monetary conditions” in order to bring the rate down close to its target of 4 percent.

Driving the price pressures is “steadily rising domestic demand,” the bank said in its statement, spurred by the Kremlin’s decision to inject more money into the economy as it fights a war in Ukraine.

The surge in spending “is increasingly exceeding the capabilities to expand the production of goods and the provision of services,” the bank said.

At a news conference Friday, Elvira Nabiullina, the head of the Central Bank, said that increased government spending was one of the reasons for the interest rate increase. Russia’s defense budget has more than tripled since last year’s invasion of Ukraine, and it is scheduled to reach almost a third of the government’s spending next year.

Russia was largely successful at weathering the immediate storm produced by sanctions aimed at punishing it for the invasion. The restrictions greatly curtailed its lucrative trade with Western countries and largely isolated it from the global financial system.

But as Russia spends vast amounts on its war machine, its industrial production and labor markets are unable to keep up with the increased demand, translating into higher inflation and high levels of borrowing.

Yevgeny Nadorshin, the chief economist at the PF Capital consulting company in Moscow, said the central bank’s effort to slow the economy by raising interest rates could “suffocate the country’s growth.”

“We are in the moment when growth is transforming into a recession,” Mr. Nadorshin said.

He pointed to Russia’s mortgage and consumer borrowing markets, which have experienced rapid expansion.

“People are still tense about the economy, but they feel that in the moment, things are much better than expected,” Mr. Nadorshin said in a phone interview. “People feel that this is a short period that they must take advantage of.”

But Dmitri Polevoy, an economist in Moscow, said that despite high interest rates, he doesn’t see major risks with the Russian economy.

“This story is exclusively about inflation,” Mr. Polevoy said in written comments to questions posed through a messaging service. “Under the current budgetary policy and with the same external conditions,” he said, “the risk of a recession is low.”

After experiencing a nosedive following the invasion of Ukraine, the Russian economy has returned to growth. The International Monetary Fund recently estimated economic output would rise 2.2 percent this year, as oil exports have largely evaded Western sanctions and found new customers in India, China and other countries.

The country has also been able to import Western goods from some former Soviet republics, as well as Turkey and Gulf States. Russian businesses, including banks, have adapted too, serving needs since the departure of many Western companies.

Sumber: www.nytimes.com

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