Russia’s central bank announced on Friday that it will cut its key interest rate by one percentage point to 17% to support the slowed economic growth during wartime pressure. Analysts pointed out that this move highlights the pressure facing the Kremlin’s wartime economy: war expenditures have led to an expanded fiscal deficit and high inflation.
To combat inflation, the Russian central bank had previously raised the key interest rate to 21%. However, due to criticisms from business leaders and lawmakers that the high rates were suppressing economic activities, the central bank has started to lower its key interest rate.
In its statement, the Russian central bank warned that although inflation rates slightly decreased in July and August, they still remain high at 8.2%, stating that “inflation expectations in recent months have not significantly changed… overall, inflation expectations remain high.”
While the Russian central bank focuses on price control, the Russian Ministry of Finance injects funds into the economy in the form of defense orders and military recruitment bonuses, which has propelled economic growth, wage increases, and inflation during the past three and a half years of the Russia-Ukraine war.
The latest data shows a significant slowdown in the Russian economy. Gross Domestic Product (GDP) in the second quarter grew by only 1.1% year-on-year, lower than the 1.4% in the first quarter and significantly lower than the 4.5% at the end of last year, with a quarterly contraction of 0.6%.
From January to July this year, the Russian fiscal deficit rose to 4.9 trillion rubles (approximately $580 billion), a significant increase from 1.1 trillion rubles (approximately $130 billion) during the same period last year. According to the Kyiv School of Economics tracking Russian economic and oil income data, Russian fiscal expenditures exceeded the budget plan by 129%, while oil and gas revenues declined by 19% compared to the same period last year, partly due to the weak global oil prices.
Experts point out that the Russian central bank’s focus on price control, combined with the government’s increased spending to support the war, may exacerbate economic uncertainty in the coming months.