Russia raises key interest rate again as inflation and exchange rate worries continue

Russia's central bank has raised its key lending rate by one percentage point to 13%, a month after imposing an even larger hike

Russia Economy (Copyright 2023 The Associated Press. All rights reserved.)

The Central Bank of Russia raised its key lending rate by one percentage point to 13% on Friday, a month after imposing an even larger hike, as concerns about inflation persist and the ruble continues to struggle against the dollar.

The increase comes as annualized inflation rose in September to 5.5% and the bank said it expected it would reach 6%-7% by the end of the year.

“Inflationary pressure in the Russian economy remains high. Significant pro-inflationary risks have crystallized, namely the domestic demand growth outpacing the output expansion capacity and the depreciation of the ruble in the summer months," the bank's board said in a statement. "Therefore, it is required to additionally tighten monetary conditions.”

The bank in August increased the lending rate to 12% — a jump of 3.5 percentage points — as the ruble fell to 100 against the dollar. Although the ruble's exchange rate improved mildly after the rate hike, it remains around 95 to the dollar, significantly weaker than a year ago when it was trading at around 60 to the U.S. currency.

By raising borrowing costs, the central bank is trying to fight price increases as Russia imports more and exports less, especially oil and natural gas, with defense spending going up and sanctions taking a toll. Importing more and exporting less means a smaller trade surplus, which typically weighs on a country’s currency.