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. Last Updated: 07/27/2016

Central Bank Raises Its Interest Rates to 100%

The Central Bank raised official interest rates Thursday to 100 percent from 80 percent, but few bankers thought this would be enough to slow Russia's quadruple-digit inflation rate.

Vladimir Belokon, a senior adviser to Sberbank, the state savings bank that is now a semi-private company, said the rise in interest rates was clearly part of an attempt to slow the growth in the money supply and inflation.

"It should be positive but we do not expect a big change quickly", he said.

The financial markets have long expected the rise, which Central Bank Chairman Viktor Gerashchenko first flagged in mid-February. Official rates have not increased since last spring.

The rise will quickly affect rates charged by commercial banks, currently a minimum of 170 percent.

In theory, higher interest rates reduce demand because when rates are high, people and businesses are less likely to borrow to finance their spending. Lower demand in turn means less pressure on prices, in other words, lower inflation.

But the 20-percent rise in the official rate is unlikely to significantly restrain investment demand. Loans at a 100-percent rate of interest are still cheap in real terms, representing only a tiny fraction of 1993's 2, 600-percent inflation rate.

Moreover, the Central Bank has supported demand by continuing to issue credits at its low interest rates, either directly to firms or indirectly through commercial banks. The bank also lends money to the state itself.

One government agency estimated that 1. 6 trillion rubles in new credits were issued in the month of January alone, roughly 60 percent of the gross domestic product.

The Central Bank has countered its critics, who charge that the bank's loose policy on credits has been a primary cause of Russia's rocketing inflation, by arguing that the majority of credits are not issued to banks and companies but to the Ministry of Finance, which needs them to pay for the government's budget deficit.

The bank has also defended its policy of extending cheap credits to industry, saying it has had to support production. But Belokon said that cheap credits had often been used for speculative purposes: Firms took the soft credits and used them to buy hard dollars.