Russia's central bank said it would keep its benchmark policy rate at a record low of 21%, despite strong backlash from influential business leaders.
This decision comes despite strong inflation in consumer prices, fueled by military spending linked to the Kremlin's war against Ukraine.
Central bank governor Elvira Nabiullina justified the move by saying business lending had tightened more than expected due to October's rate hike, which took the benchmark rate to its all-time high. current.
The central bank left open the possibility of an increase at its next meeting and said inflation was expected to fall to 4% annually next year, from 9.5% currently.
Factories produce everything the military needs, from vehicles to clothing, while labor shortages drive up wages. Large enlistment bonuses also increase the number of rubles people can spend in their bank accounts, driving up prices.
Additionally, the weak Russian ruble has led to higher prices for imported goods, such as cars and consumer electronics, from China, which has become Russia's main trading partner since Western sanctions were lifted. disrupted economic relations with Europe and the United States.
Russia's military spending is largely financed by oil exports, which have shifted from Europe to new customers in India and China, less inclined to respect sanctions and cap the price of a barrel at 57 euros. Russian oil sales.
Critics say high rates dampen business activity and the economy.
High interest rates can curb inflation, but they also make it more expensive for businesses to access the credit they need to operate and invest.
Critics of the monetary policy include Sergei Chemezov, head of state-controlled defense and technology conglomerate Rostec, and steel tycoon Alexei Mordashov.
The move has put Russian President Vladimir Putin in a difficult position, as many of those criticizing it come from within the Kremlin itself.
A growing disconnect between the president and the central bank is also becoming increasingly evident, with Putin acknowledging the criticism by saying that “some experts believe that the central bank could have been more efficient and could have started using certain instruments earlier.”
Putin must maintain economic growth and ensure social stability, says Alexander Kolyandr, senior researcher at the Center for European Policy Analysis. “Inflation is not a good recipe for ensuring the stability of society. In addition, it must wage its war, and the State does not have sufficient resources to achieve these three objectives: growth, price stability and military spending”.
Nabiullina “doesn't care much about pressure from businessmen”says Kolyandr. “She is quite independent and knows that Putin supports her. But the general slowdown in the economy has certainly played a role.”
Last month, the central bank turned to other ways of tightening credit to slow inflation, including imposing stricter lending standards and regulatory requirements on banks.
“We will see next year whether these measures were effective or not. But for now, this gave Nabiullina the opportunity to keep the rate unchanged, to satisfy industrialists, politicians and President Putin himself , and to sit and wait.”
“I think the chances of the rate going up at the next meeting are pretty high.”
However, despite an inflation rate of 9.3%, Mr Putin opened his annual press conference on Thursday by saying the economy was on track to grow by almost 4% this year.
He added that if inflation is “an alarming sign”wages have increased at the same rate and “Overall, the situation is stable and safe.”
The central bank will hold its next policy meeting on February 14, 2025.
