July 24, 2023
Russia’s Central Bank made its first interest rate hike in 16 months on Friday, in response to mounting concerns over inflation triggered by Moscow’s spending on the invasion of Ukraine and sharp depreciation of the ruble.
In a statement, the regulator announced the increase of its key rate from 7.5% to 8.5%. This decision marks the first rate rise since just four days after the invasion of Ukraine, when the rate was emergency-hiked to 20% as a measure to stabilize the Russian economy.
Throughout 2023, Governor Elvira Nabiullina has been warning about the inflationary pressures escalating due to rapid government spending and the steep devaluation of the Russian ruble. Such depreciation raises the prices of imported goods and items made with imported components.
The Central Bank admitted that there is “persistent inflationary pressure in the economy,” indicating that its 4% inflation target for the year would likely not be achieved.
The Bank’s statement further highlighted the ongoing increase in price growth rates, including various underlying indicators, which have already surpassed 4% in annualized terms and are continuing to rise.
Nabiullina is scheduled to hold a press conference later on Friday to provide more detailed information regarding the Central Bank’s decision to raise interest rates.
Despite initial predictions of a severe economic downturn with a 10% GDP contraction and soaring inflation above 20% following the invasion of Ukraine, the Russian economy has outperformed expectations. Analysts attribute this resilience to the Central Bank’s strict capital controls introduced last year, which stabilized the ruble’s value and curbed excessive government spending on military-related expenses.
However, the significant additional spending, coupled with the impact of Western sanctions and a decline in Russian energy sales to Europe, has led to a $28 billion deficit for the Kremlin in the first half of 2023.
The Russian ruble has experienced a substantial depreciation, falling from a high of 54 against the U.S. dollar in June of the previous year to 91 on Friday.
In its statement, the Central Bank highlighted that this sharp depreciation has contributed to higher prices, further exacerbating inflationary pressures.
The Bank issued a warning that if inflation does not subside, further interest rate hikes may be considered in the future.
Source: Moscow Times
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