Russia's central bank raises interest rates to 21% to combat inflation fueled by military spending

MOSCOW — Russia's central bank on Friday raised its key interest rate by two percentage points to a record 21% to combat growing inflation as government spending on the military weighs on the economy's ability to produce goods and services and pushes workers' wages into the drive up.

The central bank said in a statement that “domestic demand growth still significantly exceeds opportunities to expand the supply of goods and services.” Inflation, the statement said, “is significantly above the Bank of Russia's July forecast” and “inflation expectations continue to rise.” It raised the prospect of further interest rate hikes in December.

The Russian economy continues to grow due to continued oil export revenues and government spending on goods, including military. One consequence of this is inflation, which the central bank tries to combat with higher interest rates, which make it more expensive to borrow and spend on goods, theoretically reducing price pressure.

The new interest rate is the highest in Russia since the collapse of the Soviet Union in 1991. The previous high was reached in February 2022, when the central bank raised interest rates to a then-unprecedented 20% in a desperate attempt to support the ruble in response to the crippling sanctions imposed after the Kremlin sent troops into Ukraine.

The Russian economy grew by 4.4% in the second quarter of 2024, and the unemployment rate was at a low of 2.4%. Factories are mostly running at full speed, in many cases producing goods useful to the military, such as vehicles and clothing. In other cases, domestic producers are filling gaps created by imports from abroad that were disrupted by sanctions or by foreign companies' decisions to stop doing business in Russia.

State revenues are supported by economic growth and continued exports of oil and gas, although sanctions and the $60 price cap imposed by Western governments on Russian oil are far from valid. The cap is enforced by prohibiting Western insurers and shippers from dealing with oil priced above the cap. But Russia was able to circumvent the price cap by setting up its own fleet of tankers without Western insurance, and collected about $17 billion in oil revenue in July.