Following a substantial rate hike, Russian Central Bank Governor Elvira Nabiullina and Deputy Governor Alexei Zabotkin held a news conference to explain the reasoning behind raising the key rate to 21%, the highest level since February 2003.
Nabiullina explained that the central bank had considered three options: raising the rate to 20%, 21%, or even higher. Maintaining the current rate was not considered due to inflationary pressures.
The decision to increase to 21% ultimately hinged on their inflation forecasts, though the possibility of another hike in December remains if inflationary data warrants it. She added that any future rate reduction would only be considered once inflation trends align with the bank’s predictions, though she could not provide a specific timeline.
Discussing the primary inflation drivers, Nabiullina pointed to an ongoing imbalance between supply and demand and noted the impact of recent budgetary changes.
Additional factors include loan growth rates and persistently high inflation expectations, which have even increased. She acknowledged the recent depreciation of the ruble but noted that, year-on-year, the exchange rate is relatively stable, with the bank estimating that a 10% shift in the exchange rate could impact inflation by roughly 0.5%.
Looking at inflation targets, Nabiullina said current price growth is expected to reach around 4% by year’s end, with the central bank aiming to achieve its target by the first half of 2026.
In response to criticism from businesses over the high rate, she argued that while companies believe cheaper credit would stimulate growth, an overheated economy with historically low unemployment would likely see a “wage race” without corresponding productivity gains, which could undermine sustainable growth.
Nabiullina warned against any abrupt rate hikes solely aimed at quickly curbing inflation, as such measures could result in volatile swings in demand and an excessive cooling of economic activity, which would hinder steady growth. However, she indicated that a recession is not anticipated, as GDP growth projections remain stable, showing resilience despite challenges in some sectors.
The governor also compared the current rate increase to a similar hike in early 2022 when the bank raised rates to 20% to stabilize financial conditions rather than directly tackle inflation. At that time, the priority was to prevent fund outflows from banks. Today, the hike addresses inflation risks more directly.
Deputy Governor Zabotkin addressed corporate credit growth, explaining that credit expansion reflects the overall demand level in the economy, regardless of whether it’s market-driven or fueled by state requirements.
Finally, Nabiullina spoke about ongoing discussions within the BRICS group regarding an independent payment system. While the Ministry of Finance and international partners are involved, the complexity of the project means it will take time to develop. For now, alternative payment systems will be utilized as these discussions continue.
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