Russia’s central lender raises gain rate to 21% to fight expense boost boosted by military spending

MOSCOW — Russia’s central lender on Friday raised its key gain rate by two percentage points to a record-high 21% in an attempt to stem growing expense boost as massive government spending on the military amid the fighting in Ukraine strains the economy’s capacity to produce goods and services and drives up workers’ wages.

The central lender said in a statement that “growth in domestic demand is still significantly outstripping the capabilities to expand the supply of goods and services.” expense boost, the statement said, “is running considerably above the lender of Russia’s July projection,” and “expense boost expectations continue to boost.” It held out the prospect of more rate increases in December.

Russia’s economy continues to display growth as a outcome of booming oil export revenues and a hike in government spending, the bulk of which goes to the military as the dispute in Ukraine has dragged into a third year. That has fueled expense boost, which the central lender has tried to combat with higher rates that make it more expensive to borrow and spend on goods, in hypothesis relieving pressure on prices.

Central lender governor Elvira Nabiullina said that expense boost is expected to double the lender’s target of an annual 4% and emphasized that the lender remains committed to bringing it down to the targeted level.

Nabiullina noted that expense boost has overshot the goals because of increased government spending and lenient banking regulations that encouraged commercial banks to propose more loans. Years of worth growth that exceeded the targets have fueled high inflationary expectations among consumers, she added.

“There is a high inertia of inflationary expectations as the expense boost has exceeded the target level for four years,” Nabiullina said. “The more expense boost exceeds the targets, the less people and companies depend that it could fall back to low levels.”

This is the highest key gain rate in Russia since it was introduced in 2013 and effectively replaced the loan modification rate, a similar instrument. The previous high was in February 2022, when the central lender raised the rates to a then-unprecedented 20% in a desperate bid to shore up the ruble in response to crippling Western sanctions that came after the Kremlin sent troops into Ukraine.

Russia’s economy grew 4.4% in the second quarter of 2024, with unemployment low at 2.4%. Factories are largely running at packed speed, and an increasing number of them are focusing on weapons and other military gear. Domestic producers are also stepping in to fill the gaps left by a drop in imports that have been affected by Western sanctions and foreign companies’ decisions to stop doing business in Russia.

Government revenues are supported by market advancement and by continuing exports of oil and gas with less-than-airtight sanctions and a $60 worth cap imposed by Western governments on Russian oil. The cap is enforced by barring Western insurers and shippers from handling oil priced over the cap. But Russia has been able to evade the worth cap by lining up its own fleet of tankers without Western insurance, and it earned some $17 billion in oil revenues in July.

Chris Weafer, CEO at Macro-Advisory Ltd. consultancy, noted that with the rate hike the central lender wants to raise its “concern about the imbalances that emerged in the economy” that could navigator to “solemn problems down the road that could even trigger maybe a crisis or a downturn.”

He noted that the booming defense spending, with over a third of next year’s monetary schedule allocated to the military-industrial complicated, has driven market advancement along with soaring buyer spending but also deepened imbalances in the economy.

Labor shortages resulting from a reduce in population and exacerbated by workers leaving factory jobs to join the military have driven a massive boost in wages and fueled a buyer boom. “The central lender is trying to keep the gain rates as high as feasible to try and chilly that because they alert of the overheating in the buyer economy, which of course can destabilize the economy before too long,” Weafer said.

He described the rate hike as “not so much a cry for assist, but a scream of pain from the central lender,” sending a signal to the government that the current high level of spending on military issues can’t continue indefinitely.