Russia's Central Bank Raises Key Lending Rate to Combat Inflation

MOSCOW — In a decisive move to address soaring inflation, Russia's Central Bank has raised its key lending rate by 200 basis points to 18.00%, marking the highest level in over two years. This action comes as the country grapples with an overheated economy exacerbated by Western sanctions linked to its military actions in Ukraine. The bank's statement highlighted that inflation is developing “significantly above” its forecasts, driven by robust domestic demand that exceeds the supply capabilities. The Central Bank reported an increase in annual inflation from 8.6% in June to 9.0% in July, largely attributed to rising utility costs. In light of these developments, the bank has revised its inflation forecast for the year to between 6.5% and 7%. It indicated that further increases in the key rate may be considered in upcoming meetings, emphasizing that achieving the target inflation rate of 4% will require tighter monetary conditions than previously anticipated. The bank's strategy to raise interest rates aims to curb inflation by making borrowing more expensive and encouraging savings. This inflation surge is linked to heightened consumer activity, driven by increased household incomes and strong investment demand, supported by fiscal incentives and high business profits. However, persistent labor shortages mean that the growth in domestic demand is not matched by an adequate supply of goods and services, further intensifying inflationary pressures.