FRANKFURT, Germany — Russia’s central bank made a smaller than usual interest rate cut on Friday, a compromise move to support stagnating economic growth even as inflation fueled by war spending remains higher than the bank’s target.
The quarter-point cut to 14 per cent shows the bank slowing its pace of rate cuts from a peak of 21 per cent last year. The bank had been cutting by at least a half-percentage point until a quarter-point cut on June 19.
The slowing pace of cuts appears to be a compromise between complaints from Russia’s business lobby about high rates and the central bank’s aim of reducing inflation to its target of 4 per cent annually. High rates combat inflation but make life more expensive for businesses that want to borrow to invest or cover expenses.
On Wednesday, Alexander Shokhin, head of the Russian Union of Industrialists and Entrepreneurs business association, warned of a wave of “autumn bankruptcies” if the central bank maintained its rate level.
Russia’s economy held up better than many expected despite Western sanctions after Putin launched the invasion of Ukraine. The budget has been supported by continuing exports of oil, while military orders kept factories running.
Inflation however has been fed by increased government spending on the war and more recently by higher fuel prices, the result of Ukrainian drone attacks that have disabled refineries and led to shortages in some areas. Unemployment however remains low and the central bank said that some of the current inflationary pressure was due to temporary factors.
Annual inflation stood at 5.9 per cent as of July 20 and is forecast to be six to seven per cent next year, still above the bank’s goal of 4 per cent, while companies reported significantly lower expectations for demand and production.
Growth has slowed from over four per cent per year in 2023-2024 and one per cent last year as the stimulus from increased federal spending on defense has worn off. The government has forecast 0.4 per cent this year. In recent days the economy has faced further disruption from Ukrainian drone attacks on the warehouses of Wildberries, the country’s biggest online retailer and an outlet for hundreds of thousands of small businesses.
