Russia’s Central Bank Raises Interest Rate to Combat Soaring Inflation

In a move aimed at curbing soaring inflation, Russia’s Central Bank has raised its key lending rate to its highest level in over two years. The decision was announced on Friday, July 26, and is intended to increase the cost of borrowing and encourage savings.

According to Elvira Nabiullina, the head of the Central Bank, the decision was made in response to four key triggers. These include persistent inflation, consumer activity that is not cooling, a positive gap in the economy that is not narrowing, and growing labor market rigidity. Additionally, the bank cited new pro-inflationary risks associated with Western sanctions.

Nabiullina emphasized that the economy is still significantly overheated, with high GDP growth rates in the first and second quarters of 2024, while inflation has accelerated. She warned that a shortage of labor and production capacity could lead to a stagflation scenario, where economic growth slows down despite attempts to stimulate demand, and inflation accelerates. To prevent this scenario, the bank has tightened its policies.

The bank revised its inflation forecast for this year to 6.5-7%, and indicated that it may consider further increases in the key rate at its upcoming meetings. Next year, inflation is projected to decrease to 4.5-5%, and remain close to 4% in the future.

The decision to raise the interest rate is attributed in part to “geopolitical tensions,” a reference to Western sanctions. The bank conceded that returning the inflation rate to its 4% target requires tighter monetary conditions than previously assumed.

Additional sources: TASS