The Bank of Russia increased interest rates by 200 basis points to 15 percent, raising borrowing costs for the fourth time in a row. This is a response to the weak ruble, persistent inflation and growing budget expenses.
The increase is significant and higher than analysts expected. As the president of the Russian central bank, Elvira Nabiulina, said, an increase of 100 or 150 basis points was also considered. She also added that this may not be the last increase in interest rates this year.
War costs money
Nabiullina also said the budget had a significant impact on Friday’s decision. Russia is increasing government spending, pumping money into the defense sector to boost military production and pursue what it calls a “special military operation” in Ukraine.
“The updated medium-term fiscal policy parameters assume a slower-than-expected decline in fiscal stimulus in the coming years,” the bank said.
The bank also admitted for the first time that it may not be possible to return inflation to the 4% target next year, forecasting inflation at the end of 2024 at 4-4.5%.
Interest rate increases
The central bank’s monetary tightening cycle began this summer, when inflationary pressures from a tight labor market, strong consumer demand and the budget deficit were compounded by a falling ruble.
Russia gradually reversed the emergency increase to 20% it took in February 2022, after Moscow sent troops to Ukraine, prompting wide-ranging Western sanctions. At the beginning of this year, interest rates were just 7.5%.
The central bank announced that inflation in 2023 will be 7.0-7.5%. He previously forecast inflation at the end of the year at 6.0-7.0 percent. As of October 16, annual inflation was 6.38 percent.