Russia raises interest rates in hopes of lowering inflation

The Russian central bank announced on Friday that the main interest rate in Russia will remain 20%. The rate has been at this level since late February, when it jumped from 9.5% to 20% in one go. With this high interest rate, Russia hopes to contain the rise in inflation.

Inflation has risen worldwide since the end of the coronavirus crisis, and especially since energy prices hit record highs. But Russian inflation is mainly affected by Western sanctions, which prevent many products and commodities from coming to the country and there is no longer any foreign currency.

In February inflation in Russia was 9.2% and is expected to hover around 10% in March. This means that life in Russia is 10% more expensive in March than in the same month last year. For the whole year, experts expect inflation of 20%.

The central bank’s goal is to increase this inflation to 4% on an annual basis. And according to economic theory, high interest rates help. Because the higher the interest rate, the more money people have in their savings account and the less they spend. As a result, inflation falls.

The only question is whether this theory is correct in this case. Price increases in the Russian economy are now mainly due to shortages of products and raw materials – not because people are overspending. Therefore, high interest rates do not guarantee that these products will suddenly reach Russia.

A similar problem exists in Europe. Due to the shortage of containers as a result of the corona crisis, many raw materials are becoming more difficult in European countries, causing prices to rise.

Experts have been complaining for some time that the European Central Bank (ECB) should raise interest rates, but Carsten Brzeski, chief economist at ING, previously told NU.nl that this is not happening. Earlier this week, the US central bank decided to raise interest rates by a quarter of a percentage point.

Source: NU

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