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Russia Hikes Interest Rates for First Time Since Post-Invasion Fallout

21.07.23 22:00
Russia’s Central Bank hiked interest rates on Friday for the first time in 16 months, as Moscow’s spending on its invasion of Ukraine and sharp falls in the value of the ruble have triggered fresh concerns over inflation.

The regulator raised its key rate from 7.5% to 8.5%, it said in a statement.

The move is the Central Bank’s first interest rate rise since four days after the invasion of Ukraine, when it hiked rates to 20% in an emergency decision as it scrambled to stabilize the Russian economy.

Throughout 2023, Governor Elvira Nabiullina has warned about bubbling inflationary pressures due to rapid government spending and a steep devaluation in the value of the Russian ruble — which pushes up the price of goods bought from abroad, or those made with imported components.

On Friday, the Bank said there was “persistent inflationary pressure in the economy” that mean its 4% inflation target would not be hit this year.

“Inflationary pressure is on the rise. Current price growth rates, including a variety of underlying indicators, have exceeded 4% in annualized terms and are still increasing,” the Bank said in a statement.

The Russian economy has largely performed better than expected since the invasion of Ukraine, bucking initial predictions that GDP could shrink by 10% and inflation spiral above 20%.

Analysts credit this to the Central Bank’s introduction last year of strict capital controls, which reversed a collapse in the value of the ruble and, increasingly as the war has dragged on, billions of dollars of government spending on weapons, military equipment and salaries for soldiers.

But that extra spending, combined with the effects of Western sanctions and a collapse in Russian energy sales to Europe, have pushed the Kremlin into a $28 billion deficit in the first half of 2023.

The ruble has fallen from a high of 54 against the U.S. dollar last June to 91 on Friday.

In its statement on Friday, the Bank said this depreciation was feeding through into higher prices.

It warned that further rate rises were a possibility if inflation did not fall back, Moscow Times reports.