Russia’s central bank took decisive action to address the country’s ongoing inflation and currency struggles by raising its key interest rate to 15%. This unexpected move, which marks the fourth consecutive increase in borrowing costs, aims to curb inflation and strengthen the weak rouble. The global economy has experienced rapid price rises, partly due to Russia’s invasion of Ukraine. In September, inflation in Russia reached 6%, prompting the Bank of Russia to raise rates by two percentage points in an effort to reach its 4% target.
The central bank has been actively combating inflation since July, with interest rates rising by a total of 7.5 percentage points. This includes an emergency hike in August when the rouble plummeted against the US dollar, prompting the Kremlin to call for tighter monetary policies. The Bank of Russia expressed concerns about the significant increase in inflationary pressures, attributing it to high lending growth and an imbalance in demand for goods and services exceeding supply.
Moreover, disruptions in supply chains caused by the COVID-19 pandemic contributed to rising prices globally. The situation worsened when Russia’s invasion of Ukraine in February 2022 disrupted global food supplies and drove up energy costs. Notably, food and energy price inflation played a significant role in the overall upward trend in prices worldwide.
Russia’s economic challenges extended beyond inflation. Imports were rising faster than exports, and increased military spending on the Ukraine war further strained the economy. Western sanctions imposed on Russia in response to its actions in Ukraine also took a toll. Despite capital controls and oil and gas exports providing some support to the rouble, the currency has lost approximately 25% of its value against the US dollar since the conflict began.
The Bank of Russia has resorted to sharp hikes in interest rates in the past. When Russia initially attacked Ukraine, rates were raised from 9.5% to 20%, albeit gradually reduced shortly thereafter. Nevertheless, experts warn that continued rate hikes may not be sufficient to stabilize the economy, and it may face challenges in attracting foreign investment due to the impact of Western sanctions.
The weakening of the rouble has largely been attributed to the sanctions, with Russia’s trade suffering as a result. Many European Union countries, previously reliant on Russian oil and gas, have committed to reducing their imports from Russia and have successfully secured alternative suppliers. The introduction of a price cap plan by EU leaders limits Russia’s earnings from oil exports, and the country has also been excluded from Swift, an international payment system. The European Commission has highlighted the effectiveness of these sanctions, noting a decline in coal exports and a more than 25% decrease in oil production in Russia.
As Russia faces economic challenges, it remains crucial to monitor the impact of the interest rate hike and ongoing inflation-curbing efforts. The country’s ability to stabilize its rouble and attract investment will depend not only on monetary policies but also on resolving geopolitical tensions and improving trade relations with the international community.
