Military needs force Russian central bank to hike interest rate to 21%

MOSCOW, Russia: Russia's central bank has raised its key interest rate to a record 21 percent to curb inflation, which is driven by heavy government spending, especially on military needs.

The increase, announced on October 25, reflects concerns that demand is outpacing Russia's capacity to produce goods and services, pushing up prices and wages.

According to the central bank's statement, inflation is running well above previous forecasts, and inflation expectations are continuing to rise. The bank also indicated that further rate hikes may be considered in December.

Despite sanctions and international pressure, Russia's economy remains buoyant, supported by oil exports and robust government spending on both civilian and military goods. This economic activity, however, has contributed to rising inflation, which the central bank is attempting to control by making borrowing more costly to reduce spending.

This 21 percent rate is the highest since the introduction of the key interest rate in 2013, surpassing the previous peak of 20 percent in February 2022. At that time, the bank's response was to stabilize the ruble following harsh sanctions imposed after Russia's invasion of Ukraine.

Russia's economy grew by 4.4 percent in the second quarter of 2024, with unemployment remaining low at 2.4 percent. Many factories are operating at maximum capacity, producing goods for the military and compensating for the lack of foreign imports due to sanctions and international businesses exiting the Russian market.

Continuing oil and gas exports, despite a Western-imposed US$60 price cap on Russian oil, further bolster the country's government revenue.

To evade this cap, Russia has organized its own fleet of tankers with non-Western insurance, allowing it to maintain substantial oil revenue, with earnings estimated at $17 billion in July alone.