Russian central bank holds key rate at two-decade high

A Russian state flag flies over the Central Bank headquarters in Moscow, Russia. Russia’s central bank kept its key rate at 21 percent. REUTERS/Shamil Zhumatov/File Photo

MOSCOW, Russia – Russia’s central bank kept its key rate at 21 percent on Friday, locking in two-decade-high borrowing costs as it battles rampant inflation.

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

READ: Russia’s central bank raises interest rate to 21% to fight inflation

Annual inflation shot above 10 percent last month for the first time in two years, with price increases forecast to average between seven to eight percent this year.

“Current inflationary pressures have eased but remain high,” the central bank said in a statement announcing the decision to leave rates unchanged.

It added that achieving its inflation target of four percent would “require a prolonged period of maintaining tight monetary conditions in the economy”.

Policymakers raised the key rate to 21 percent in October, despite complaints from businesses and banks that high borrowing costs were hurting economic growth.

In January, Moscow-based economic research group CMASF warned that Russia was facing a “large-scale spike in corporate bankruptcies” amid high interest rates.

Russia is spending almost nine percent of its GDP on defence and security, according to Russian President Vladimir Putin, and military spending is set to jump by almost 30 percent again in 2025.

That spending has bloated the Russian economy, partially offsetting the impact of Western sanctions.

But since so much spending is being directed by the state, which is less responsive to higher borrowing costs, analysts say interest rate rises may not be an effective tool to bring down inflation.