Russia’s central bank raises interest rate to record-high 21% as it fights inflation

Russia’s economy continues to show growth as a result of continuing oil export revenues and government spending on goods, including for the military

Russia's central bank has increased its key interest rate to a record 21% on Friday, to tackle soaring inflation as military spending puts pressure on the economy's ability to produce goods and services, leading to increased wages.

The bank released a statement explaining that "growth in domestic demand is still significantly outstripping the capabilities to expand the supply of goods and services." It also noted that inflation "is running considerably above the Bank of Russia’s July forecast," with "inflation expectations continue to increase."

The bank didn't rule out further rate hikes in December. Despite these challenges, Russia's economy is still experiencing growth, fuelled by oil export revenues and government expenditure, including military spending. The central bank is using higher rates as a tool to make borrowing more costly, which theoretically should reduce spending on goods and ease price pressures.

This rate is the highest since the key interest rate was established in 2013, replacing the refinancing rate. The previous record was set in February 2022 when the rate was raised to 20% in response to sanctions following Russia's military action in Ukraine.

Russia's economy saw 4.4% growth in the second quarter of 2024, with unemployment figures impressively low at 2.4%. Factories are operating at full capacity, often to manufacture items for military use such as vehicles and clothing.

In other instances, domestic producers are stepping in to fill the void left by interrupted imports due to sanctions or foreign companies' decisions to cease trading in Russia. The government's revenues are bolstered by this economic growth and the continued export of oil and gas despite less-than-strict sanctions and a $60 price cap imposed by Western governments on Russian oil.

This cap is enforced by prohibiting Western insurers and shippers from dealing with oil priced above the cap. However, Russia has managed to circumvent this price cap by utilising its own fleet of tankers without Western insurance, raking in approximately $17bn in oil revenues in July.