Smart Economy

World

Russia hikes interest rates to 15% as inflation soars

 Update: 15:30, 30 October 2023

Russia hikes interest rates to 15% as inflation soars

Russian central bank has put up its key interest rate to 15 per cent to try to curb inflation and bolster a weak rouble.

The higher-than-expected rate hike of two percentage points raises borrowing costs for the fourth time in a row.

Globally the pace of price rises has been high, in part due to Russia's invasion of Ukraine. Inflation in Russia hit 6 per cent in September.

There has also been increased government spending in Russia as it pours resources into its war machine.

The Bank of Russia, the country's central bank, has now raised rates by 7.5 percentage points since July as it seeks to get inflation back down to its 4 per cent target.

This includes an unscheduled emergency hike in August as the rouble tumbled past 100 to the dollar and the Kremlin called for tighter monetary policy.

"Current inflationary pressures have significantly increased to a level above the Bank of Russia's expectations," it said on Friday.

Demand for goods and services was outpacing supply, and it said there was high lending growth.

Supply chain disruption during the coronavirus pandemic helped push up prices, then Russia's invasion of Ukraine in February 2022 disrupted global food supplies and drove up energy costs.

Food and energy price inflation have been major factors in pushing up prices in general across the world.

Pressure has also been mounting on the Russian economy due to imports rising faster than exports and military spending growing for the Ukraine war.

Russia was targeted by Western sanctions in response to its assault on Ukraine.

The rouble plummeted after war first broke out, but was bolstered by capital controls and oil and gas exports.

However, the currency has lost about a quarter of its value overall against the US dollar since the conflict began.

This is not the first time the Bank of Russia has hiked interest rates sharply. When Russia first attacked Ukraine the bank raised rates from 9.5 to 20 per cent, but began cutting them shortly afterwards.

But rate hikes can only go so far in steadying an economy, and analysts have said Russia could struggle to attract investment due to Western sanctions.

A major factor in the rouble weakening has been Russia's trade being hit by the sanctions, economists have said.

Since the outbreak of war, many EU countries which relied on Russian oil and gas have pledged to wean themselves off imports from the country and many have since found alternative suppliers.

EU leaders introduced a price cap plan to limit the amount Russia earns from its oil exports and the country has also been excluded from Swift, an international payment system used by thousands of financial institutions.

The European Commission has said the Russian sanctions are working.

Coal exports have fallen, and oil production in the country is down more than a quarter, it said in a blog post in August.