Russian central bank hikes rate as inflation jumps

Russia's central bank on Friday raised interest rates to 19 percent amid the country's ongoing Ukraine offensive, warning inflation was running too high and it needed to cool the economy.

Inflation was running at an annual rate of 9.05 percent in August, the country's statistics agency said earlier this week.

Russia has faced economic headaches since launching its February 2022 Ukraine offensive.

"Current inflationary pressures remain high," Russia's central bank said in a statement.

"Further tightening of monetary policy is required to resume the disinflation process, reduce inflation expectations, and ensure the return of inflation to the target in 2025," it added.

Russia has faced volatile prices since it sent troops into Ukraine in February 2022, triggering a barrage of Western sanctions and strict counter-measures in a bid to stabilise the economy.

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A splurge in government spending -- up almost 50 percent since 2021 -- to fund the conflict has seen billions poured into the military and defence sector.

That has helped shield the economy from the collapse that many predicted, but also pushed prices up fast.

"The labour market remains tight. Unemployment has dropped to a new historic low," the central bank said.

Numerous sectors have suffered personnel shortages as hundreds of thousands of men have been recruited to fight in Ukraine.

The bank's director Elvira Nabiullina called those shortages "the main obstacle to increasing production" in the country.

'Unacceptable' inflation level

Inflation was slightly down in August but still well above the government's target level of four percent.

The central bank has aggressively raised rates over the past year, taking them back towards the emergency level of 20 percent that was introduced straight after the start of the conflict.

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It says such hikes are needed to stop the economy "overheating" and stave off the risk of "stagflation" -- where growth slows but inflation remains high.

But steep borrowing costs have hit some consumers and businesses, many of which rely on short-term debt.

Nabiullina said she was committed to achieving a lasting lowering of inflation.

"We are prepared to maintain strict monetary conditions for as long as necessary," she told a press conference, calling the current level of inflation "unacceptable".

Numerous business chiefs have complained in recent months about the rising cost of borrowing, which they say hampers investment and growth in sectors not related to the military.

Russian authorities however have forecast economic growth of 3.9 percent for this year, followed by a slight slowdown over the coming two years.

The bank said it expected inflation would "probably" remain above 6.5 percent at the end of this year.

Source: AFP