Russia is raising interest rates again to curb the ruble’s decline
The Central Bank of Russia (BCR) said on Friday it will raise its official interest rate from 13% to 15%, the fourth consecutive increase in just over three months, to counter inflation and the weakening of the ruble, which continues to deteriorate in trouble despite their efforts. “Current inflation pressures have increased significantly and are above the expectations of the Bank of Russia,” the BCR said in a statement.
“Therefore, it is necessary to tighten monetary policy even further,” he explained, with the aim of bringing inflation from currently +6% “closer to the target (…) of +4% in 2024”. This increase is larger than expected by observers, who had only expected an increase of one point.
The announcement comes just a day after the approval of budget plans that would increase military spending by 68% in 2024. “The budget was an important factor in our decision,” BCR President Elvira Nabiulina admitted at a press conference.
The war in Ukraine is putting a heavy strain on Russia’s finances and economy. Under the impact of sanctions, the weakening of the ruble in recent months has been accompanied by a return of inflation, which has many Russians fearing for their purchasing power. The reason lies, in particular, in the significant decline in income related to the sale of hydrocarbons due to the sanctions and the declared determination of the Europeans to end their energy dependence on Moscow.
The BCR had already increased its key interest rate, first in July (from 7.5% to 8.5%), then urgently to 12% in mid-August to counteract the weakening of the ruble, and finally up to 13% in mid-September.
However, this did not have the expected effect: the ruble remains weak against the euro and the dollar. On Friday, it took 93.3 rubles to buy a dollar and 98.6 rubles to buy a euro, almost as low as in March 2022, shortly after the invasion of Ukraine.
In this gloomy context, the BCR had already stated that it expected growth to slow in the second half of 2023. However, she also noted a “faster development” than she had forecast in September. The monetary institution also revised up its inflation forecasts for 2023, “between 7 and 7.5%.” “The peak of inflation, in our opinion, will be reached in the spring of next year,” Nabiulina told reporters.