Russia’s central bank hikes interest rate to 21% to fight stubborn inflation

• The Russian central bank raised its key interest rate to 21% on Friday.
• Inflation in Russia hit 8.6% year-on-year in September, well above the central bank’s 4% target.
• It has largely been driven by heavy defense spending amid the ongoing war in Ukraine.

Russia’s central bank raised its key interest rate to a record high on Friday as inflationary pressure continues in the country.

The Bank of Russia raised the benchmark rate by 200 basis points to 21%, saying inflation was “running considerably above” its July forecast.

Inflation hit 8.6% year-on-year in Russia in September, versus a 4% target.

“Inflation expectations continue to increase,” the bank said in a statement, adding: “Growth in domestic demand is significantly outstripping the capabilities to expand the supply of goods and services.”

“Further tightening of monetary policy is required to ensure the return of inflation to the target and reduce inflation expectations,” it said.

The Kremlin has long been battling high inflation and warnings of an overheating economy.

Economic growth has been driven by huge defense spending on the invasion of Ukraine, which staved off fears of a recession but also kicked up inflation.

Moscow has said defense spending will keep going up.

Russia can probably go for years years before it has to confront its overspending, Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center fellow, wrote in the Financial Times earlier this month.

“This is an unpleasant truth for policymakers in Europe and the US,” Prokopenko said.