Russia Raises Key Interest Rate to 16%... Inflation Soars Amid War Impact

The Central Bank of Russia has decided to raise the benchmark interest rate to 16%. Russia has been increasing interest rates for five consecutive months since July, but it appears unable to curb inflation triggered by increased fiscal spending following the Ukraine war.

Russian President Vladimir Putin [Photo by Yonhap News]

On the 15th (local time), the Central Bank of Russia raised the benchmark interest rate from the previous 15% to 16%. Since July, Russia's benchmark interest rate has jumped by 8.5 percentage points.

The central bank cited inflation as the reason for the rate hike. The annual consumer price inflation rate is approaching about 7.0 to 7.5% by the end of this year. The country's gross domestic product (GDP) growth rate is expected to exceed 3%, surpassing the forecast made last October.

The Central Bank of Russia warned that if inflation is not controlled, the domestic economy will not be able to withstand the pressure. Elvira Nabiullina, Governor of the Central Bank of Russia, explained, "Think of the economy as a car. If you try to run faster than its performance, the engine will overheat and it won't go far."

Experts analyzed that the Russia-Ukraine war is having a complex impact on Russia's inflation. A significant factor is that the Russian government has excessively increased fiscal spending to support the wartime economy, which has caused inflation.

Last year, Russia's defense budget accounted for about one-third of the total public budget. This is a significant increase compared to the 13.9 to 23% share of defense spending in the total budget from 2011 to 2022. Russia has also planned to allocate 10.8 trillion rubles (approximately 155.52 trillion won), equivalent to one-third of the total budget, for defense next year.

With the presidential election approaching next year, the Russian government is also significantly increasing welfare spending, such as paying families of fallen soldiers an average wage for 30 years. The British magazine The Economist pointed out that Russia's fiscal stimulus spending accounts for 5% of GDP, surpassing pandemic-era expenditures.

As liquidity increased, overheated demand outpaced supply, causing prices in Russia to soar. As of last month, egg prices in Russia rose by more than 40% compared to the previous year. Chicken prices also increased by 29.3%. The Central Bank of Russia analyzed that domestic demand "exceeds the capacity to expand the production of goods and services."

The Economist stated, "Russia has been coping with high inflation since the onset of the war, but now it seems to be losing control," and assessed that if Russian President Vladimir Putin continues the war, it will be difficult for the Russian economy to fully stabilize.

This content was produced with the assistance of AI translation services.