San Francisco Frontiers - Russian central bank sharply raises inflation forecast

Inflation has been rising fast across the Russian economy for months, driven by massive government spending on the Ukraine conflict and deep labour shortages.

Prices are now expected to go up between seven to eight percent this year, compared with an earlier forecast for 2025 of between 4.5 to five percent, the central bank said in a statement.

This is despite a rally in the value of the ruble this week after presidents Donald Trump and Vladimir Putin held a phone call, raising hopes of a thaw in US-Russian relations.

Annual inflation ticked up to 9.9 percent year-on-year in January, compared with 9.5 percent in December, according to the Rosstat statistics service.

The central bank held borrowing costs at a two-decade high of 21 percent on Friday, despite complaints from businesses and banks that the high key rate is hurting economic growth.

"Price pressures remain significant," central bank governor Elvira Nabiullina told a press conference after the rate announcement.

Nabiullina cautioned fast price increases would persist, despite a "slight slowdown" in inflation data at the start of the year.

"We are not yet talking about a trend reversal," she said.

Russia is spending almost nine percent of its GDP on defence and security, according to Putin, and military spending is set to jump by almost 30 percent again in 2025.

This spending has ballooned the size of the Russian economy, partially offsetting the impact of Western sanctions.

But since so much spending is being directed by the state, which is less responsive to higher borrowing costs, analysts say interest rate rises may not be an effective tool to bring down inflation.

B.Johnson--SFF