Key rate at 21%: Russia makes a risky bet against inflation

Yesterday, Friday, the Russian Central Bank raised its key rate to 21%, a historic level which had not been reached since 2003. Behind this drastic decision lies an attempt to counter significant inflation, fueled by military spending without precedent and an economy in full transformation due to international sanctions. For Moscow, the time has come to fight against the inflationary spiral, while businesses and the Russian market fear the repercussions of this monetary policy.

Monetary policy in response to uncontrolled inflation

The Russian Central Bank (BCR) announced this Friday, October 25, 2024, a sudden increase in its key rate from 19% to 21%, a record since 2003. This new monetary tightening aims to “ensure the return of inflation to the 4% objective” explains the official press release from the BCR. With inflation at 8.63% in September, well beyond forecasts, this decision was expected by many observers, but its scale surprised more than one. As a reminder, the BCR had already raised its rate from 18% to 19% in September to try to curb inflation, without immediate success.

This rise in prices, largely fueled by massive public spending linked to the war effort in Ukraine, continues to weigh on the Russian economy. Since 2021, the federal budget has exploded, with an increase of almost 50%, mainly to finance military spending. In 2025, the Defense budget is expected to jump by another 30%, to 13.5 trillion rubles, or around 130 billion euros. The Central Bank points directly these expenses as a factor in persistent inflationin a cycle that currently seems difficult to stop.

Economic repercussions and future challenges

This sudden increase in the key rate is causing serious concern among business leaders in Russia. The high cost of bank loans, already highlighted in recent weeks, risks weighing even more heavily on investments, particularly in sectors not linked to the military industry. Many companies struggle to finance their projects, which slows down economic growth. “Monetary tightening slows down investments and consumption,” confirm several business leaders in a report from the Rosstat agency.

Furthermore, the massive reorientation of the Russian economy towards the war effort led to labor shortages in several key sectors. The mobilization of hundreds of thousands of men for the front, as well as the exodus of part of the population, limited the country's production capacities. This explosive cocktail of inflation and labor shortages threatens to eventually plunge Russia into a period of stagflation, where economic growth remains weak while prices continue to rise.

The Russian Central Bank's decision to increase its key rate to 21% is a risky bet. While it aims to curb inflation, it also risks strangling non-military sectors of the economy and slowing growth. The context remains marked by major uncertainties, notably the outcome of the conflict in Ukraine and the impact of Western sanctions. In the medium term, Russia could find itself even more dependent on its military spending, thereby fueling an inflationary spiral that is difficult to contain. The country's economic future therefore looks gloomy, with few signs of stabilization on the horizon. It would not be surprising if many Russian companies turned to solutions like investing in cryptos, particularly Bitcoin.