Russia hikes interest rates to 21 per cent, highest since 2003

MOSCOW, Oct 25, 2024 (AFP): Russia's central bank hiked interest rates to 21 per cent on Friday, taking borrowing costs to their highest level in more than 20 years amid surging inflation.

The rise takes rates above an emergency level introduced in February 2022 -- just after Moscow ordered troops into Ukraine -- and to their highest since 2003.

"Further tightening of monetary policy is required to ensure the return of inflation to the target and reduce inflation expectations," the bank said in a statement announcing the increase.

The bank directly blamed high government spending for inflation and said it could hike rates yet again if the pace of price rises does not cool.

"Additional fiscal spending and the related expansion of the federal budget deficit in 2024 have pro-inflationary effects," it said.

Inflation has surged amid a massive increase in government spending on the Ukraine offensive that has triggered labour shortages across the economy.

Price rises were running at 8.6 per cent on an annual basis in September, more than double the official 4.0-percent target.

Russian lawmakers voted Thursday to increase defence expenditure by almost 30 percent next year, another sign Moscow is not planning to halt its spending on the offensive, grinding through its third year, anytime soon.

Several sectors of the economy are facing intense labour shortages, as hundreds of thousands of men have been called up to fight, fled the country or been recruited by a booming domestic weapons' industry.

That has created strong growth despite an unprecedented package of Western sanctions that Washington hoped would cripple the Russian economy.

The International Monetary Fund this week raised its growth forecast for Russia in 2024 to 3.6 percent.

But it has also led to a cycle of spiralling wages and prices that the Central Bank has long warned undermines economic stability.

Official borrowing costs in Russia have not been above 20 percent since 2003.

They regularly topped 100 percent throughout the 1990s, a decade of economic volatility and hardship following the collapse of the Soviet Union.

For years President Vladimir Putin has boasted of economic stability under his leadership, with his first years in office in the 2000s seeing an oil-led boom and rising wealth.