Bank of Russia’s benchmark interest rate
The Russian central bank on Tuesday raised interest rates by the most it had since the early weeks of the war in Ukraine, a dramatic move that underlines the scale of concern about Russia’s economic stability.
By announcing an emergency meeting with one day’s notice, the central bank had signaled that it could act aggressively to stem rising prices and a weakening currency. Tuesday’s move, a 3.5-percentage-point increase in the benchmark rate, to 12 percent, was the bank’s second attempt to cool down the economy in less than a month, after a one-point increase on July 21.
The ruble has lost about a quarter of its value since the start of the war as heavy government spending fuels inflation in the cost of goods and services.
The national currency briefly broke through the symbolically important exchange rate of 100 to the dollar on Monday, but has been strengthening modestly against the dollar since the central bank announced its meeting.
The central bank implied in its statement that the government’s huge spending increase since the start of the war had outstripped the Russian economy’s ability to produce enough products to meet the new demand, which “amplifies the underlying inflationary pressure,” it said. This has compelled individuals and businesses in Russia to look abroad for everything from smartphones to military-grade semiconductors, pushing up imports and weakening the ruble.
Annual inflation has averaged more than 7 percent in the past three months, the central bank said in a statement, a major deviation from its target of 4 percent.
The bank’s sharp rate increase came a day after the Kremlin’s chief economic adviser implicitly blamed the central bank for the weakening ruble. In a column in the Russian state news media, the adviser, Maksim Oreshkin, said the currency was losing its value because the central bank was providing excessively cheap credit.
A “strong ruble is in the interest of the Russian economy,” Mr. Oreshkin wrote.
Since Russia began its full-scale invasion of Ukraine, Moscow’s cautious central bank has been torn between the need to maintain economic stability and political pressure to flood the economy with cheap money. After more than doubling interest rates, to 20 percent, at the outbreak of the war, the bank steadily brought them down last year, leading to a credit boom that helped reduce social tensions at the cost of feeding inflation.
The increase in spending has come as Western sanctions have reduced Russian state revenues. Falling income from energy exports has pushed the country’s budget into a deficit this year. Labor shortages, caused by the military mobilization and an exodus of workers, have further debilitated the economy.
Evgeny Kogan, a professor at the Higher School of Economics in Moscow, argued in an article published on Finam, a Russian financial website, that the weakening currency “undermines confidence in the country’s economy and its financial policy.”
A weak ruble, Mr. Kogan wrote, could make doing business in Russia unappealing to international companies and drive people to transfer their savings into foreign currencies.
Amid these challenges, the Kremlin said last week that the country’s economy had grown 4.9 percent in the three months through June, the first quarterly economic growth since the start of the war.
The central bank’s aggressive moves to cool the economy are likely to slow down that pace.