Volkswacht Bodensee - Russia holds key rate at two-decade high despite slowdown fears

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

Eye-watering lending rates have meanwhile hit businesses hard, with some of the country's top corporate leaders putting pressure on the central bank to relax rates.

In a statement announcing the rate decision, Russia's central bank acknowledged lending activity was "subdued" but that inflation, running above 10 percent, was still too high.

Russia's target rate of inflation is four percent, but price increases are not expected to reach that level until 2026, and could average between 7-8 percent in 2025.

"The Bank of Russia will maintain monetary conditions as tight as necessary to return inflation to the target in 2026," the bank said.

In a video call with bank governor Elvira Nabiullina and cabinet officials on Thursday, President Vladimir Putin acknowledged that inflation was too high and that Russia's 2025 economic growth would be "slightly lower".

But he said this was part of a "soft landing" that Russia was actually "striving for".

Economists have warned for months of a slowdown in Russia's economic activity, with falling oil prices, high interest rates and a downturn in manufacturing all contributing to headwinds.

Russian lender Raiffeisenbank said in a research note in March that confidence in the manufacturing sector had "significantly decreased over the last couple of months", and that production in the oil industry had also slowed.

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.

But economists have cautioned that growth driven by the defence industry is unsustainable and does not reflect a real increase in productivity.

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, according to analysts.

H.Kuenzler--VB