The Russian central bank decided on December 20 to keep its key interest rate stable at 21%, contrary to experts’ expectations of an increase, Russian state news agency TASS reported.

To curb inflation fueled by war spending, Russia’s central bank raised its interest rate from 7.5% in July 2023 to the current 21% – the highest level since the early 2000s.

The tight monetary policy of Elvira Nabiullina, the head of the central bank, has drawn criticism from companies in Russia’s military-industrial complex. On December 19, Russian President Vladimir Putin also mentioned the issue, saying that some experts believe the central bank should have used tools other than interest rate hikes to combat inflation.

Most analysts, including those surveyed by Russian media outlet RBC, expected a rise of 200 basis points to 23%.

Ahead of the decision, major Russian banks increased returns on savings deposits to 24-25% per year, reflecting expectations of tighter monetary policy.

The central bank said that based on inflation and credit trends, the feasibility of another interest rate hike would be examined at its next meeting.

Nabiullina has been embroiled in a conflict over tariff increases with Sergei Chemezov, the influential CEO of state defense giant Rostec.

“If we continue like this, most companies will practically go bankrupt,” Chemezov said in October, commenting on the central bank’s interest rate hikes.

Former economic adviser and opposition politician Vladimir Milov told the Kyiv Independent in November that both sides had legitimate concerns.

“Chemezov is right that companies have to close at such a high interest rate,” he told the Kyiv Independent. “Nabiullina is right that the interest rate cannot be lowered, otherwise there would be hyperinflation like in Turkey.”

He continued that “there is only one way out – to end the war and withdraw Russian troops from Ukraine.”

Balancing inflation and maintaining economic stability remains a crucial challenge for Russia’s central bank as the wartime economy continues to strain the country’s financial system.

Can Russia sustain its war effort as the ruble falls and inflation soars?

With the purchasing power of the Russian ruble at its lowest level since March 2022, the economic consequences of the full-scale invasion of Ukraine are becoming glaring. Russia’s rising war spending has fueled inflation and prompted Russia’s central bank to raise its interest rate to its highest level.