A surprise decision from the Russian central bank – “One wonders how the central bank has been able to be so independent”

Russian the central bank decided on Friday to keep its key interest rate unchanged at 21 percent. The decision was a surprise, as the central bank had been widely expected to continue raising interest rates to curb inflation.

Senior economist at the Bank of Finland’s Emerging Economies Research Institute (Bofit). Bluebird Parviainen says he could have bet for a rate hike. According to him, analyst and economist surveys had predicted an interest rate hike.

“Inflation had accelerated and inflation expectations had remained high,” Parviainen tells STT.

According to the central bank, annual inflation in Russia already accelerated to 9.5 percent in mid-December. It clearly exceeds the central bank’s four percent inflation target.

The increase in prices has been accelerated, among other things, by a severe labor shortage, which has worsened after Russia started a large-scale war of aggression in Ukraine in 2022. Inflation is also fueled by Russia’s inflated military spending.

Parviainen thinks that the central bank may have emphasized the slowdown in lending during the late fall. According to him, it is also possible that the central bank bent under political pressure.

In Russia, the powerful figures of the business world have recently criticized the central bank’s high interest rates. For example, the CEO of the Russian state arms company Rostec Sergei Tshemezov has characterized interest rates of more than 20 percent as “madness”. Tshemezov is the president Vladimir Putin close friend.

Finland The bank’s Parviainen thinks that the governor of the Russian central bank Elvira Nabiullinan leeway may now have come in handy.

“After all, people have even wondered how the central bank has been able to be so independent in such an authoritarian society,” says Parviainen.

According to him, Nabiullina has played a central role when Russia has tried to be creative in squeezing the economic sanctions of Western countries and succeeded in doing so well.

“He has been a really hard level professional. I’ve concluded that’s why he’s been given so much freedom.”

Central bank himself justified Friday’s decision by saying that financial conditions have tightened more than expected since the key interest rate was last raised at the end of October.

During this year, the Central Bank of Russia has reduced its key interest rate from 16% to 21%. The interest rate is now at its highest level in more than two decades.

However, the effectiveness of tight monetary policy in curbing inflation has remained weak.

“With the other hand, the Kremlin increases government spending, supports lending and actually works against the actions of the central bank,” says Parviainen.

A swarm according to the increase in the prices of food products, such as butter and eggs, has accelerated in Russia, which may cause grumbling among the citizens. On the other hand, the wage level has also risen, which supports the purchasing power of Russians.

On Thursday, President Putin acknowledged concerns about rapid inflation, but assured that the country’s economy is stable.

“Inflation is a worrying sign,” Putin said at his annual news conference.

In Thursday’s television broadcast, Putin refrained from directly instructing the central bank on Friday’s interest rate decision. However, he said he hopes the decision is “balanced and meets the needs of the moment”.

Friday According to Parviainen, the surprise decision may also indicate that the Russian central bank is worried about the slowdown in economic growth.

He says that in Russia, before the interest rate decision, many banks had raised their deposit rates really high, for example to 26 percent.

“People start keeping their money in an account instead of spending it, especially if there is some kind of uncertainty in the air,” says Parviainen.

“It can slow down economic growth even more if we start putting money in the account.”

The Bank of Finland predicted in October that Russia’s economic growth will slow down to around one percent next year. This year, the Russian economy is expected to grow by 3.5 percent.