In response to mounting inflation pressures, Russia’s central bank raised its benchmark interest rate by 200 basis points to 21% on Friday. The bank’s statement highlighted that “domestic demand growth is significantly outpacing the capacity to expand supply,” attributing the inflation spike to heavy government spending on military needs, which has tightened the economy's capacity to produce goods and services. The statement also hinted at possible rate hikes in December if inflationary pressures persist.
The Russian economy has maintained growth in recent quarters, largely buoyed by oil revenues and increased domestic production, particularly in sectors that support military supply chains. The central bank’s aggressive interest rate hike aims to control inflation by making borrowing more costly, ideally reducing overall spending and price pressures.
This new peak rate surpasses previous highs, including the central bank’s emergency increase to 20% in February 2022 after Western sanctions were imposed following Russia’s invasion of Ukraine.
The Russian economy grew by 4.4% in Q2 2024, while unemployment remained low at 2.4%, with factories operating at high capacity to meet both military and consumer demand. Government revenue continues to benefit from steady oil and gas exports, aided by Russia's circumvention of Western-imposed price caps through a self-maintained fleet of oil tankers. In July alone, oil exports generated approximately $17 billion.
