Russia's central bank holds off on interest rate hike amid friction
between inflation, war spending
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 [December 21, 2024] By
DAVID McHUGH
Russia's central bank has left its benchmark interest rate at a record
21%, holding off on further increases despite high consumer inflation
fueled by the Kremlin's war against Ukraine.
The decision Friday comes amid criticism from influential business
figures, including tycoons close to the Kremlin, that high rates are
putting the brakes on business activity and the economy.
And it underlines the ongoing friction in the economy between military
spending and stable prices for consumers.
Central Bank of Russia Gov. Elvira Nabiullina said that lending to
companies had tightened more than expected due to the October rate hike
that brought the benchmark to its current record level. The central bank
held open the possibility of an increase at its next meeting and said
inflation was expected to fall to an annual 4% next year from its
current 9.5%.
Factories are running three shifts making everything from vehicles to
clothing for the military, while a labor shortage is driving up wages
and fat enlistment bonuses are putting more rubles in people's bank
accounts to spend. All that is driving up prices.
On top of that, the weakening Russian ruble raises the prices of
imported goods like cars and consumer electronics from China, which has
become Russia's biggest trade partner since Western sanctions disrupted
economic relations with Europe and the U.S.
Russia’s military spending is enabled by oil exports, which have shifted
from Europe to new customers in India and China who aren’t observing
sanctions such as a $60 per barrel price cap on Russian oil sales.
High interest rates can dampen inflation but also make it more expensive
for businesses to get the credit they need to operate and invest.
Critics of the central bank rates and of Nabiullina have included Sergei
Chemezov, the head of state-controlled defense and technology
conglomerate Rostec, and steel magnate Alexei Mordashov.
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Russian President Vladimir Putin gestures while speaking during his
annual news conference and call-in show at Gostinny Dvor in Moscow,
Russia, Thursday, Dec. 19, 2024. (AP Photo/Alexander Zemlianichenko)
 Russian President Vladimir Putin
opened his annual news conference on Thursday by saying the economy
is on track to grow by nearly 4% this year and that while inflation
is “an alarming sign," wages have risen at the same rate and that
"on the whole, this situation is stable and secure.”
Putin acknowledged there had been criticism of the central bank,
saying that “some experts believe that the Central Bank could have
been more effective and could have started using certain instruments
earlier.” Asked what decision the Central Bank was going to make on
the rate, Putin said that Nabiullina didn’t tell him what the rate
will be. “She may not know it herself yet as they discuss it during
the board meeting and make the final decision during discussion,” he
said. “I hope that the decision will be well-balanced and conform to
today’s needs.”
Putin is in a difficult situation because he needs to keep the
economy growing and ensure social stability, said Alexander Kolyandr,
senior fellow at the Center for European Policy Analysis. “And
inflation is not a good recipe for keeping society stable. On top of
that he needs to wage his war, and there are not enough resources in
the state to meet all three” goals - growth, stable prices, and
military spending.
Nabiullina “doesn’t care much about pressure from business people,”
Kolyandr said. “She is quite independent and she knows that she has
Putin behind her. But the overall slowing down of the economy
definitely played a role.”
The central bank has in the past month turned to other ways of
tightening lending to cool inflation such as by imposing stricter
credit standards and regulatory requirements on banks. “Whether that
was successful or not, we’ll see next year. But for the moment it
gave Nabiullina an opportunity to keep the rate unchanged, to please
the industrialists, politicians and President Putin himself, and
just sit and wait.
“I think the chances of the rate going up at the next meeting are
pretty high.”
The bank next holds a policy meeting Feb. 14.
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