Russian Central Bank Surprises Markets by Keeping Interest Rate at 21% Amid Inflation Concerns
Unexpected decision follows calls for “balanced” action from President Putin and pressure from business leaders.
In a surprising move, Russia’s central bank held its key interest rate steady at 21% on Friday, defying market expectations of a 2-percentage-point hike. The central bank cited “significant tightening of monetary conditions” as a key factor behind its decision, claiming it had created the necessary environment to reduce inflationary pressures.
The decision caught financial markets off guard, as 23 out of 27 economists polled by Reuters had predicted a rate increase to 23%. This marks a departure from the bank’s previous approach, which included a 200-basis-point hike in October to combat inflation driven by war-related spending and Western sanctions.
In a statement, the central bank pointed to the recent tightening of financial conditions, noting a decline in borrowing and credit activity.
“Given the notable increase in interest rates for borrowers and the cooling of credit activity, the achieved tightness of monetary conditions creates the necessary prerequisites for resuming disinflation processes and returning inflation to the target, despite the elevated current price growth and high domestic demand,” the bank said.
Consumer prices in Russia have been rising steadily. The country’s consumer price index (CPI) rose to 8.9% year-on-year in November, up from 8.5% in October. As of December 16, the central bank reported that annual inflation had climbed to 9.5%, well above its target of 4%. Food prices, particularly for staples like milk and dairy products, have been major contributors to the spike in inflation.
The central bank’s statement emphasized that it would review the need for a rate increase at its next policy meeting on February 14, 2025. It also maintained its forecast for inflation to return to the 4% target by 2026.
The bank’s decision came just one day after Russian President Vladimir Putin publicly urged a “balanced” approach to monetary policy during his annual question-and-answer session with citizens. Putin acknowledged that inflation was a “worrying signal” for the economy but also noted that wage growth in real terms had outpaced inflation, rising by 9% over the past year.
Putin’s intervention was seen as significant, as the central bank is supposed to operate independently. However, his remarks came amid mounting pressure from Russia’s influential business leaders, who argued that soaring interest rates were stifling investment.
Oil magnate Igor Sechin, CEO of state oil giant Rosneft, and Sergei Chemezov, head of defense conglomerate Rostec, are among the business figures said to have expressed concerns. Analysts suggested that the central bank’s decision may have been influenced by this pressure.
“The pressure from the business community worked, and the central bank decided to stop,” said economist Evgeny Kogan.
The central bank, led by Governor Elvira Nabiullina, has so far been granted considerable autonomy by Putin, but recent developments indicate that the influence of prominent business figures may have shifted the calculus.
Russia’s economy faces significant headwinds. Inflationary pressures have been exacerbated by increased government spending on the military and social support in response to the war in Ukraine. The labor market is strained, as many working-age men have been mobilized for military service, further constraining economic capacity.
The devaluation of the ruble has also played a role in driving inflation. In November, the ruble fell by approximately 15% against the U.S. dollar, driven in part by sanctions that disrupted payments for Russian energy exports. As a result, the prices of imported goods rose, further straining household budgets.
Food inflation, in particular, has been a sore point. Prices for basic goods such as milk, butter, and vegetables have risen by double digits. During his Q&A session, Putin blamed the spike on Western sanctions and a poor harvest.
Despite these pressures, Russia’s economy is projected to grow by 4% in 2024, according to the International Monetary Fund (IMF). However, the IMF expects growth to slow to 1.3% in 2025. The IMF’s director for Europe, Alfred Kammer, explained that the Russian economy is “pushing against capacity constraints” and that tighter monetary policy will inevitably weigh on GDP growth.
“A tight monetary policy, in order to bring down inflation, slows down aggregate demand, and in 2025 will have these effects on GDP. That’s why we are seeing the slowdown,” Kammer said.
