Russian central bank holds interest rate at 21%

Russia’s central bank has announced it will hold its benchmark interest rate at a record 21%, despite fierce backlash from influential business leaders.

The move comes despite high consumer inflation, which has been fuelled by military spending on the Kremlin’s war against Ukraine.

The central bank’s governor, Elvira Nabiullina, justified the move by explaining that lending to companies had tightened more than expected due to the October rate hike that brought the benchmark to its current record level.

The central bank held open the possibility of an increase at its next meeting and said inflation was expected to fall to an annual 4% next year from its current 9.5%.

Factories are producing everything that is needed by the military, from vehicles to clothing, while a labour shortage is driving up wages. Large enlistment bonuses are also adding more rubles into people’s bank accounts to spend, all of which is driving up prices.

Furthermore, a weak Russian ruble has led to an increase in the prices of imported goods like cars and consumer electronics from China, which has become Russia’s biggest trade partner since Western sanctions disrupted economic relations with Europe and the US.

Russia’s military spending is largely enabled by oil exports, which have shifted from Europe to new customers in India and China who less keen to observe sanctions with a €57 per barrel price cap on Russian oil sales.

Critics say that high rates are putting the brakes on business activity and the economy.

High interest rates can dampen inflation, but also make it more expensive for businesses to get the credit they need to operate and invest.

Critics have included Sergei Chemezov, the head of state-controlled defence and technology conglomerate Rostec, as well as steel magnate Alexei Mordashov.

The decision has put Russian President Vladimir Putin in a difficult position as many of those criticising the move come from within the Kremlin itself.

A growing misalignment between the president and the central bank is also becoming increasingly evident, with Putin acknowledging the criticism saying that “some experts believe that the central bank could have been more effective and could have started using certain instruments earlier.”

Putin needs to keep the economy growing and ensure social stability, says Alexander Kolyandr, senior fellow at the Cenre for European Policy Analysis. “And inflation is not a good recipe for keeping society stable. On top of that, he needs to wage his war, and there are not enough resources in the state to meet all three goals – growth, stable prices and military spending.”

Nabiullina “doesn’t care much about pressure from business people,” says Kolyandr. “She is quite independent and she knows that she has Putin behind her. But the overall slowing down of the economy definitely played a role.”

The central bank has in the past month turned to other ways of tightening lending to cool inflation such as by imposing stricter credit standards and regulatory requirements on banks.

“Whether that was successful or not, we’ll see next year. But for the moment it gave Nabiullina an opportunity to keep the rate unchanged, to please the industrialists, politicians and President Putin himself, and just sit and wait.”

“I think the chances of the rate going up at the next meeting are pretty high.”

However, despite an inflation rate of 9.3%, Putin opened his annual news conference on Thursday by saying the economy is on track to grow by nearly 4% this year.

He added that while inflation is “an alarming sign”, wages have risen at the same rate and that “on the whole, this situation is stable and secure.”

The central bank will hold its next policy meeting on 14 February 2025.