Russia’s Central Bank raises rates to 16 percent

On Friday, Russia’s central bank raised its key interest rate by 1 percentage point, to 16 percent, as it continued to battle what it called “high inflationary pressures.”

The rate increase was the fifth in a row since the central bank began its current monetary tightening cycle in July, when the rate was 7.5.

in a statement, the central bank said it expected the annual inflation rate to approach 7.5 percent this year and predicted that “tight monetary conditions will remain in the economy for a long period.” Authorities are targeting an inflation rate of 4 percent.

At the press conference after the announcement, Elvira Nabiullina, head of the Bank of Russia, said the increase in interest rates was necessary to prevent the economy from overheating.

“Imagine the economy is a car, if you tried to drive it faster than it was built,” he said, “then the engine would overheat and we wouldn’t get very far.”

Since President Vladimir V. Putin ordered the Russian military to invade Ukraine in February 2022, the country’s economic policymakers have sought to navigate sweeping sanctions aimed at cutting financial ties with the West, while addressing the growing appetite of the Kremlin for spending more on the military.

Russia has managed to avoid a total collapse of the banking system and has increased trade with China, India and other countries.

But it has become clear that the Russian economy faces another challenge: financing the war while keeping inflation at bay.

The price of eggs, for example, has soared more than 40 percent since last year. according to the country’s statistics service, prompting shoppers to stockpile eggs and empty store shelves. Putin was asked about the issue Thursday at his annual news conference; He apologized for his government’s failure to address the issue.

The central bank never mentioned the war in Ukraine in its statement, but the impact was evident between the lines. Domestic demand for goods and services was “more powerfully exceeding capabilities to expand the production of goods and services,” the bank said, reflecting increased spending on arms production.

He also cited Russia’s tight labor market as a “key supply-side constraint” on the economy. Russia has faced a shortage of workers as hundreds of thousands of men have joined the fighting in Ukraine, either as part of a forced mobilization or as regular recruits. The exodus of hundreds of thousands of Russians following the invasion of Ukraine also contributed to labor shortages.

During the press conference, Nabiullina said that the central bank itself has been affected by a shortage of technology specialists.

Russia is expected to face similar economic challenges next year. On Thursday, Mr. Putin expressed his determination to continue fighting the war with Ukraine. To finance it, Russia’s defense budget for next year is expected to reach almost a third of government spending.