Russia’s central bank has held its benchmark interest rate at 21% despite criticism from powerful Kremlin-linked figures, marking a surprise decision that underscores the country’s struggle to tame inflation in an “overheating” war economy.
The move comes as President Vladimir Putin struggles to control soaring prices, which have risen sharply since Russia’s invasion of Ukraine in February 2022. Economists forecast inflation rates of up to 10% by the end of 2024, driven by a surge in defence spending and consumer demand.
Interest rates have increased significantly since July, prompting concerns about the sustainability of this strategy. Critics argue that high borrowing costs are stifling economic growth and exacerbating shortages in essential goods.
The rouble has lost around 20% of its value against the dollar since summer lows, limiting Russia’s ability to transact internationally. Unemployment remains low, hovering around 2.3%, but wage growth for unskilled workers has accelerated, with some salaries rising by as much as 45%.
Economists warn that the war is taking a toll on the Russian economy, with shortages in skilled workers and increased complexity in international transactions. The country’s economic outlook remains grim, with indicators pointing to deep-seated problems that are difficult to mask.
The situation may prompt Putin to reconsider his strategy, as economists suggest that high interest rates could ultimately undermine the war effort. “He knows the USSR collapsed because of the arms race and economic mismanagement,” said a former senior Russian official. “He needs to stop the war.”
Source: https://www.ft.com/content/f7fb9005-3e80-4ccc-adbd-a0af72856ec9