Russia’s central bank raises interest rate to 19%, says economic growth has slowed down

The Central Bank of Russian Federation has raised the benchmark interest rates in the country by 1 percentage point to 19 per cent. This is in line with the expectations of economists polled by state news agency, TASS.

In a statement, the central bank explained the reasoning behind its decision. “Current inflationary pressures remain high. By the end of 2024, annual inflation is likely to exceed the July forecast range of 6.5-7 per cent. Growth in domestic demand is still significantly outstripping the capabilities to expand the supply of goods and services.”

“Over the medium-term horizon, the balance of inflation risks is significantly tilted to the upside.”

Earlier this week, Russia’s statistics agency had said inflation was running at an annual rate of 9.05 per cent in August.

The country’s central bank has kept the possibility of increasing the already high interest rate even further in its next meeting.

The financial institution believes 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.”

Economic growth has slowed

GDP data for the second quarter of 2024, as well as high-frequency indicators in July-August showed that the growth of the Russian economy has slowed down, the central bank said. It believes that the slowdown is because of an increase in supply-side constraints and softening external demand.

Although wage growth has slowed down in recent months, it remains elevated and still outstrips labour productivity growth.

The Russian central bank has aggressively raised rates over the past year. It has said that raising the benchmark lending rate is needed to stop the economy “overheating” and stave off the risk of “stagflation”.

Stagflation happens when the GDP growth slows down, but inflation remains high. In Russia, such a situation is already visible.

With inputs from agencies