Volkswacht Bodensee - Russian central bank holds key rate at two-decade high

Prices have been rising quickly across the Russian economy for months, pushed up by massive government spending on the Ukraine conflict and deep labour shortages.

Annual inflation shot above 10 percent last month for the first time in two years, with price increases forecast to average between seven to eight percent this year.

"Current inflationary pressures have eased but remain high," the central bank said in a statement announcing the decision to leave rates unchanged.

It added that achieving its inflation target of four percent would "require a prolonged period of maintaining tight monetary conditions in the economy".

Policymakers raised the key rate to 21 percent in October, despite complaints from businesses and banks that high borrowing costs were hurting economic growth.

In January, Moscow-based economic research group CMASF warned that Russia was facing a "large-scale spike in corporate bankruptcies" amid high interest rates.

Russia reported strong economic growth for 2024, largely due to massive state defence spending which is set to jump by almost 30 percent again in 2025.

That spending has bloated the size of the Russian economy, partially offsetting the impact of Western sanctions, but economists warn it is unsustainable and does not reflect a real increase in productivity.

Analysts say interest rate rises may also not be an effective tool to bring down inflation, as so much spending is being directed by the state, which is less responsive to higher borrowing costs.

Russian President Vladimir Putin told business leaders on Tuesday that a cooling in the Russian economy was "inevitable" but warned policymakers that it should happen gradually.

"We have to act very carefully," Putin said. "So that there is no excessive cooling, as in a cryochamber."

A.Kunz--VB