Russia’s central bank increases interest rate to 21% to combat inflation driven by defense expenditures.

MOSCOW — On Friday, Russia’s central bank announced an increase in its key interest rate by two percentage points, raising it to an unprecedented 21%. This move is aimed at combating the rising inflation that is being exacerbated by increased government spending on military operations, which is straining the economy’s ability to produce goods and services while also driving up wages for workers.

In their statement, the central bank acknowledged that the “growth in domestic demand is still significantly outpacing the capabilities to expand the supply of goods and services.” They noted that current inflation rates are significantly higher than what they had projected in July. Additionally, they mentioned that “inflation expectations continue to increase,” indicating that consumers and businesses foresee higher prices in the future. The central bank hinted at the possibility of further rate hikes in December if the economic situation does not stabilize.

Despite these challenges, Russia’s economy shows signs of growth, largely due to steady revenue from oil exports and increased government spending, including expenditures on military equipment. However, this scenario has led to inflationary pressures, which the central bank is attempting to tackle by raising interest rates. Higher borrowing costs are intended to curb spending, which could alleviate some of the upward pressure on prices and bring inflation under control.