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Russia’s key interest rate is now at a record high — what does this mean for the country’s economy?

Source: Meduza

Last Friday, Russia’s Central Bank raised the key rate to 21 percent — the highest it’s been since its introduction in 2013. Though Central Bank Head Elvira Nabiullina has acknowledged that the Russian economy is becoming less responsive to rate hikes, the key rate remains the bank’s primary tool for managing inflation, which isn’t expected to come down any time soon. Meduza explains what’s going on with interest rates, how this might impact inflation, and how banks are likely to respond.

The key interest rate is the Russian Central Bank’s primary tool for controlling inflation and supporting economic stability. It determines the rate at which the Central Bank lends to commercial banks, who, in turn, lend to their clients. More loans mean more spending by people and businesses, fueling demand.

Prices rise when demand exceeds supply, and for several months, the Central Bank has been warning that Russia’s economy is operating at capacity. Production is maxed out, meaning it’s impossible to increase the supply of goods and services, and demand needs cooling. A high key rate helps in two ways: first, by discouraging borrowing with higher loan costs, and second, by making savings accounts more attractive. This approach, used by central banks worldwide, encourages people to save more and spend less.

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The Central Bank aimed to bring inflation down to four percent annually, a target it projected could be reached this year (for the first time in five years). The key rate has been set at 16 percent since December — a level the bank deemed sufficient to control price growth. Sberbank CEO Herman Gref even described it as “prohibitive [for lending].”

However, things didn’t go to plan. By summer, inflation had climbed to nine percent. In September, even as interest rates approached 20 percent, the volume of new loans continued to rise. The Central Bank said that its measures were having a reduced impact on the economy due to high government spending and a lack of banking restrictions. According to Central Bank Head Elvira Nabiullina, this doesn’t mean the key rate is ineffective — it simply needs to be even higher. Market analysts generally concur with her assessment.

In the end, the Central Bank’s board of directors raised the rate to a record 21 percent, surpassing most analysts’ expectations. At the next meeting in December, the Central Bank will consider increasing it again — to 23 percent. The 2025 forecast has also been revised, with the average rate expected to fall between 17 and 20 percent.

Will this get inflation under control?

At each of its recent quarterly meetings, the Central Bank has worsened its inflation forecast. Right now, it’s twice as high as the target rate. Some signs of a slowdown appeared this fall, but they’ve been so faint that the regulator opted to overlook them. Adding to the uncertainty, the government decided to exceed budget plans this year, increasing spending by an additional 1.5 trillion rubles ($15.3 billion).

It’s unlikely the Central Bank will be able to rein in price growth this year. While it began raising the key rate back in July, such measures typically impact the economy with a lag of three to six quarters. The regulator made a similar misstep last year, leading Elvira Nabiullina to admit that the bank should have acted sooner. According to Alfa Capital’s Yevgeny Zhornist, the 21 percent rate shows that the Central Bank is no longer willing to wait and see what happens. “The move toward the target [rate] will be more dramatic,” economist Egor Susin concurs.

Long-term inflation risks are also mounting. Russia’s Central Bank now anticipates it won’t be able to bring inflation down to four percent even next year. Meanwhile, economists surveyed by the Central Bank have little confidence in its revised forecast of five percent for 2025, offering more pessimistic predictions. Additionally, public inflation expectations, which had been declining, have hit their highest level this year, with Russians expecting price increases of over 13 percent in the next 12 months.

These concerns aren’t unfounded. The latest federal budget proposal includes a 12 percent hike in utility rates for next year — double what was originally planned. October also saw an increase in the vehicle recycling fee, which has driven up the cost of new cars in Russia and is now set to increase annually. Record state spending on defense and national security, which will drive demand for goods from workers in those sectors, has further fueled skepticism.

Employment remains a key issue as well. Unemployment is still at record lows, making it harder for businesses to hire. Companies are offering higher wages to attract talent, which increases consumer spending; businesses, in turn, offset these costs by raising prices. The Central Bank has also noted logistical challenges: due to sanctions, costs for importing goods, including those acquired through barter arrangements, have predictably risen.

How will borrowers be affected?

Borrowers generally fall into two groups: individuals and corporations. Individuals have gradually increased their debt burden since spring 2022, and as rates began to climb, lending only grew as people rushed to secure loans before costs rose further. A major driver behind this trend was a large-scale subsidized mortgage program that ended in July of this year.

Now, retail lending is gradually slowing down. Interest rates on consumer loans have reached 30 percent, and estimates show that taking out a 30-year mortgage worth five million rubles ($51,300) would mean an additional 23 million rubles ($236,200) in interest payments. A drop in the key rate could reverse this trend, but Gazprombank Investments predicts won’t happen until the second half of next year.

The situation for corporate borrowers is more complex. More than half (53 percent) of corporate loans have floating rates pegged to the Central Bank’s key rate. While Elvira Nabiullina doesn’t view this as an immediate risk, Alfa Capital warns that bankruptcies may increase. Anton Tabakh, the chief economist at Expert RA credit rating agency, sees a “risk of recession in the civilian sectors of the economy.” For businesses to manage a loan at an annual rate of 25 percent, their profitability needs to be at least that high. In Russia, profitability is around 13 percent.

Can savings accounts protect from inflation?

Bank deposits are one of the few options Russians have this year to shield their money from high inflation. Anticipating the Central Bank’s decision, banks began raising deposit yields in advance. However, with the key rate increase proving more drastic than expected, a new wave of hikes has already begun. According to Vedomosti, financial institutions plan to raise yields on deposits and savings accounts by 1-1.5 percentage points. RBC found offers with yields as high as 25 percent for one month, 22 percent for six months, 21 percent for two months, and 23 percent for three. The ruble is depreciating this year, but not at such a rapid pace.

Savings conditions could improve further by year’s end. Macroeconomist Pavel Biryukov expects at least one more key rate hike in December. His colleagues at SberInvestments agree, noting that the Central Bank’s tone is nearly as hawkish as it was in June, just before the current austerity cycle began. Sovcombank’s chief economist, Mikhail Vasilyev, concedes the key rate could be raised to 23 percent if inflation doesn’t ease by the next meeting. All these expectations are fueled by Elvira Nabiullina’s recent comment that there is “no ceiling” for the key rate.

Still, some experts remain skeptical. Economist Dmitry Polevoy, for instance, argues that lending conditions are already worsening without Central Bank intervention and calls the current tightening excessive and misguided. Egor Susin echoes this sentiment, warning of “over-tightening” as rates outpace inflation expectations and retail lending slows. “By the first half of 2025, it seems we’ll all be getting a harsh reminder of what credit risks are and how much they cost,” Susin cautions.