Russian central bank raises interest rate to 21% to combat inflation spurred by military spending
MOSCOW — Russia’s central bank on Friday raised its key interest rate by two percentage points to a record 21%, aiming to combat rising inflation as the government’s military spending strains the economy. capacity of the economy to produce goods and services and increase workers’ wages.
The central bank said in a statement that “the growth in domestic demand still far exceeds the capacity to expand the supply of goods and services.” Inflation, the statement said, “is significantly higher than the Bank of Russia’s July forecast” and “inflation expectations continue to rise.” It raises the prospect of further rate increases in December.
The Russian economy continues to show growth thanks to continued oil export revenues and public spending on goods, particularly military goods. One result is inflation, which the central bank has tried to combat with higher rates that make it more expensive to borrow and spend on goods, in theory easing pressure on prices.
The new interest rate is the highest in Russia since the breakup of the Soviet Union in 1991. The previous peak was in February 2022, when the central bank raised rates to an unprecedented 20% in a desperate attempt to prop up the ruble. in response to crippling sanctions imposed after the Kremlin sent troops to Ukraine.
The Russian economy grew by 4.4% in the second quarter of 2024, with the unemployment rate low at 2.4%. Factories are operating largely at full capacity, in many cases to produce items the military can use, such as vehicles and clothing. In other cases, domestic producers fill gaps left by imports from abroad that have been disrupted by sanctions or by the decision of foreign companies to cease operations in Russia.
Government revenues are supported by economic growth and continued oil and gas exports, with sanctions far from airtight and a $60 price cap imposed by Western governments on Russian oil. The cap is enforced by prohibiting Western insurers and shippers from handling oil priced above the cap. But Russia managed to escape the price cap by fielding its own tanker fleet without Western assurance, and it earned some $17 billion in oil revenues in July.
