The Board of Directors of the Central Bank decided in October to increase the base interest rate to 21%, which is the highest level since the collapse of the Soviet Union in 1991.
Annual inflation in Russia more than doubles the 4% target set by the goverment, and Nabiullina has warned that inflation could reach this level only in 2026.
“We have indicated that the central bank allows for the possibility of an interest rate increase,” Nabiullina said at an investment forum in Moscow.”We need to get inflation down, and it hasn’t started coming down yet,” she said.
analysts predict that the Russian central bank could raise the base interest rate to 22% or 23% at its December meeting.
Nabiullina has called interest rates a powerful tool in the fight against inflation. But economists argue that as inflation is fueled by record government spending to finance the war in Ukraine, higher borrowing costs have less of an effect on curbing price rises than in a market economy.
As it continues its war in Ukraine, Moscow has already increased military spending to levels not seen as the days of the Soviet Union, mass-producing missiles and drones and paying high salaries to hundreds of thousands of front-line troops.
How will the recent interest rate hikes impact consumer loans and spending in Russia?
Interview: Understanding Russia’s Economic Crisis and Interest Rate hikes with Financial Expert dr. Elena Lokteva
Editor (Time.news): Thank you for joining us today, Dr. Lokteva. With the Central Bank of Russia recently raising the base interest rate to 21%, the highest since the Soviet Union’s collapse, what immediate implications does this have for both consumers and businesses in Russia?
Dr.Elena Lokteva: Thank you for having me. The important increase in the base interest rate to 21% is a signal of concern regarding inflation, which is currently more than double the government’s target of 4%. For consumers,this means higher borrowing costs for loans and mortgages,likely leading to reduced spending. For businesses, especially those reliant on loans for expansion, the increased rates can stunt growth and innovation.
Editor: It sounds like a challenging situation. You mentioned inflation, which has been a hot topic lately. Central Bank Governor Elvira Nabiullina suggested inflation may onyl reach the target level by 2026. What factors are contributing to such high inflation rates at the moment?
Dr. Lokteva: Indeed,the inflation rates are tied to multiple factors. A significant part of the challenge comes from substantial government spending to support the war in Ukraine.The higher military expenditures have led to increased demand for resources, which, coupled with existing supply chain issues, has created an habitat where prices rise more rapidly. The situation is further complicated by global market influences and sanctions, which directly affect the Russian economy.
Editor: Nabiullina called interest rates a powerful tool against inflation. However, some economists argue that their effectiveness is reduced in the current context. Can you elaborate on this viewpoint?
Dr. Lokteva: Certainly. While high interest rates can control inflation in a typical market economy by curbing spending and borrowing,the context here is unique. government spending linked to military actions is somewhat insulated from these rates.This creates a scenario where raising rates might not effectively decrease inflation as it typically would. It can make borrowing more expensive but may not alter the fundamental behaviors leading to price increases.
Editor: Analysts predict that the base interest rate could rise to 22% or even 23% in December. what might the longer-term consequences be for the Russian economy if these predictions hold true?
Dr. Lokteva: If rates rise to such levels, we could see even tighter financial conditions for both consumers and businesses. In the long term, if inflation persists, this could lead to a recession as businesses struggle to operate under the weight of high-interest payments and decreasing consumer spending. A restricted liquidity environment can stifle growth, exacerbate unemployment, and ultimately create a cycle of economic decline.
Editor: With these impending changes,what practical advice would you offer to individuals and businesses navigating this economic landscape?
Dr.Lokteva: Individuals should consider reducing their debt exposure and reassessing their budgets to accommodate potential increases in costs, especially for loans. Businesses should focus on cash flow management and may need to pivot strategies to maintain resilience, possibly exploring option financing solutions or cutting non-essential costs. Additionally, they should stay informed about economic signals to navigate this challenging environment proactively.
Editor: Thank you, Dr.Lokteva, for your insights into Russia’s economic condition and the implications of the recent interest rate hikes. Your expertise sheds valuable light on an evolving situation.
Dr. Elena Lokteva: Thank you for having me. It’s crucial to keep these discussions going as we monitor the developments that will shape the economy in the coming months.