Russian central bank raises rates to curb wartime inflation
Record military spending on the war against Ukraine is “overheating” the Russian economy, leading to labor shortages, macroeconomic imbalances, and rising inflation, Newsweek reported on July 27.
Despite the Kremlin's optimistic forecast of 2.9% GDP growth in 2024, Russia's economic growth is expected to decline. Massive losses in the army and Russian draft dodgers have caused labor shortages in key sectors of the economy.
"Inflationary risks associated with sanctions have materialized," said Russia's Central Bank Governor Elvira Nabiullina at a July 26 press conference. She announced an increase in the interest rate from 16% to 18%.
According to Nabiullina, a "greater tightening of monetary policy" is needed to curb inflation, which is currently running at 8.6% year-on-year. She did not rule out further increases.
"Initial plans to start cutting rates in the second half of the year had to be abandoned as inflation showed signs of spinning out of control," Bartosz Sawicki, market analyst at Conotoxia fintech, told Newsweek.
"Instead, additional tightening of monetary policy had to be enacted in an effort to cool down the overheating wartime economy. Military spending, running at around 7% of GDP, has led to serious macroeconomic imbalances, which are beginning to take their toll."
Consumer price inflation has been rising for six consecutive months, putting the Central Bank's plan to reduce it to 4% at risk due to "international sanctions leading to higher cross-border payment costs and rising fuel prices."
"This can be partially attributed to refinery capacity outages caused by Ukrainian drone strikes," Sawicki said.
This follows an earlier decision by the Council of the European Union, announced on July 22, to extend sanctions against Russia for another six months.
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