Russia’s central bank increases interest rates

The Central Bank of Russia has increased the interest rate from 4.5% to 5%.

Why did the Bank increase the interest rates?

This is the second time the apex bank is increasing the interest rates due to elevated inflation pressure. According to the bank, the inflation in the country will be in the range of 4.7% to 5.2% by 2021. It is expecting that Russia will return to its 4% target only in 2022.

What caused inflation in Russia?

Currency Depreciation caused Inflation in Russia. The Russian currency depreciated in April 2021 due to the following reasons:

  • Decrease in Russian oil prices
  • Decoupling moves in other emerging markets due to fears of US Sanctions
  • Russian military buildup near Ukraine

Relation between Currency Depreciation and Inflation

When the inflation rate of a country is high, then the prices of its goods will increase. This will make them less competitive in the international markets. Eventually these goods will experience less demand for exports and thus less demand for currency. This will ultimately lead to depreciation. Similarly, depreciation of currency will also lead to Inflation in the country.

Russian Oil Prices

Russia was producing 560 million tonnes of oil prior to the pandemic at a rate of 11.3 million barrels per day. It hit record levels in 2019. The production levels decreased for the first time as Russia agreed to cut its production level along side OPEC+ countries to stabilize oil prices. With this, Russia decreased its oil production by 9%.

Russia is expected to increase its oil production in 2022.

Background

Whenever the oil prices begin to decrease in the world market, the OPEC (Organisation of the Petroleum Exporting Countries) will decide on how to share the burden. They will then together to increase the oil prices. However, the American shale producers who are not members of OPEC do not follow the actions taken. Thus, in 2016 oil producing countries formed a cohesive bloc outside the club. Russia plays a major role in this.

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