The The Central Bank of the Russian Federation (Bank of Russia ) has formally increased the interest rate to 5 per cent from 4.5 per cent.

Reason behind the increase the interest rates

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

Caused inflation in Russia

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

  • Decrease in Russian oil prices
  • Decoupling moves in other emerging markets due to fears of USA Sanctions
  • Russian military buildup near Ukrainian border region

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

The Russian Federation was producing 560 million tonnes of oil prior to the COVID-19 pandemic at a rate of 11.3 million barrels per day. It hit record levels in the year 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 per cent.

Russia is expected to increase its oil production in the year 2022.

Backdrop

Whenever the oil prices begin to decrease in the world market, the OPEC 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 the year 2016 oil producing countries formed a cohesive bloc outside the club. Russia plays a major role in this.

OPEC is Organisation of the Petroleum Exporting Countries.

Russian central bank increases interest rates Russian central bank increases interest rates