Russia’s central bank raises key interest rate to record-high 21%

Russia’s Central Bank raised its key interest rate from 19% to a record-high 21% on Friday in an effort to combat growing inflation, according to a statement from the Central Bank’s Board of Directors. 

“Inflation expectations continue to increase,” the bank’s statement read, adding that “growth in domestic demand is significantly outstripping the supply of goods and services.”

While Russia’s defence spending for the war in Ukraine continues to increase and provide a boost to the economy, with the country’s military funding expected to account for over 40% of the annual budget next year, inflation hit 8.6% year-on-year in October, more than twice as high as the Central Bank’s 4% target.

“Monetary policy must be tightened to bring inflation down to target levels and reduce inflation expectations,” the bank said, adding that it could potentially increase rates further at its next meeting on 6 November. 

This is the third rate increase in a row by Russia’s Central Bank, and 21% is its highest value in history. The previous high of 20% was reached in February 2022, following Russia’s invasion of Ukraine. 

Russia’s government plans to hike its defence spending by 25% next year as it diverts more resources to the war in Ukraine, laying out more on the military than welfare and education combined, according to draft budget documents seen in September.

Earlier this month, the CEO of Russia’s VTB bank, Andrey Kostin, linked the volatility of the Russian key interest rate to the fact that the Central Bank’s governor was a woman. 

When asked in an interview with state-owned TV channel Rossiya 24 whether the rate could reach 25% next year, Kostin responded that it was difficult to predict because the process was “led by women”. “Yes, when women lead the process, almost anything is possible,” he said.