Russia’s central bank raised its key interest rate to 18 percent on Friday, the sixth increase in just over a year, as it tries to tame rising price increases.
Governor Elvira Nabiullina said Russian businesses were facing higher costs and payment problems as the West put pressure on Russia’s trading partners to stop helping it circumvent sanctions.
Domestic prices have risen rapidly since Moscow launched its full-scale military offensive against Ukraine in February 2022, as massive government spending and soaring wages have boosted demand across the economy.
“Inflation has accelerated and is moving significantly above the Bank of Russia’s April forecast,” the regulator said in a statement.
“Growth in domestic demand continues to significantly outpace the capacity to expand the supply of goods and services. For inflation to start falling again, additional monetary policy tightening is needed,” he added.
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The rate was previously at 16 percent and Nabiullina kept open the possibility of further increases.
Nabiullina said the economy was showing persistent signs of “overheating” and pointed to trade difficulties as another factor driving up inflation.
“The risks of secondary sanctions have indeed increased. We see this in the difficult situation with payments,” he said during a news conference, saying Russian importers face higher transaction costs.
The United States has threatened banks and companies including China, Turkey and the United Arab Emirates with tough sanctions — so-called “secondary sanctions” — if they help Russia import goods the West has sanctioned over the conflict in Ukraine.
Spending spree
Russia is set to spend nearly nine percent of its GDP on defense and security this year, according to President Vladimir Putin — a figure unprecedented since the Soviet Union as the country ramps up weapons production to fight in Ukraine .
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Rising public spending, combined with record labor shortages in many sectors, has created an inflationary spiral that Russia has been unable to shake off.
Moscow’s federal budget has jumped nearly 50 percent in the past three years — from 24.8 trillion rubles ($289 billion) in 2021, before the Ukraine attack, to a planned 36.6 trillion rubles ($427 billion) this year.
With so much spending directed by the government, which is less responsive to higher borrowing costs, analysts fear that interest rate hikes may not be an effective tool against inflation.
Consumer prices are a sensitive issue in Russia, where many people have virtually no savings and memories of hyperinflation and economic instability run deep.
The Kremlin said on Thursday it was concerned about high levels of inflation and that “measures” were being implemented to tackle the problem.
Source: AFP