Russia’s recent increase in interest rates to 21% has sparked skepticism from financial leaders, who question its effectiveness in combating inflation amidst ongoing sanctions.
The head of Russia’s VTB Bank has expressed doubts about the central bank’s decision to hike interest rates to their highest level since 2003. Despite the intention to control inflation, which is nearing 8.7%, there are concerns that this approach may not yield the intended results due to prevailing economic conditions.
Andrei Kostin, the chief of VTB Bank, highlighted that the high interest rates could slow lending significantly next year, impacting bank profits. With the backdrop of significant military expenses and Western sanctions, the effectiveness of high borrowing costs as an anti-inflation tool remains in question. ‘In the context of high military expenditures and sanctions, an instrument like the key interest rate may not be fully effective in managing inflation,’ Kostin commented in an interview with Reuters.
Despite the central bank’s steadfast policy, challenges such as subsidies on state loans and the extensive spending on defense continue to dilute the impact of raised interest rates. These policies have not only failed to curb price increases but have also stirred dissatisfaction among business leaders across the nation.
Kostin also mentioned that a more severe consequence of maintaining high rates could be the risk of stagflation — a stagnant economy paired with high inflation, which could be more detrimental than a recession. The Russian Union of Industrialists and Entrepreneurs has even suggested granting the government some control over monetary policy to address these concerns.
Governor Elvira Nabiullina of the Bank of Russia noted that inflation might soon reach a ‘turning point,’ potentially allowing for an easing of interest policies next year. However, Kostin anticipates a further increase in rates to 23% by the end of 2024, predicting that lending growth could slow to 10%, causing a notable decline in bank profitability and GDP growth.
Russia’s strategy of using high interest rates to curb inflation faces criticism and uncertainty. Financial leaders suggest that without adjusting for the current economic landscape of military expenditures and sanctions, these measures may fall short, posing greater risks of economic stagnation.
Source: Businessinsider
