Russian Bank Lending May Have Slowed Too Quickly in Inflation Fight

• Russian interest rates on deposits and loans have risen faster than its central bank’s key rate.
• A central-bank official said lending might have slowed too quickly in the battle to lower inflation.
• Russia’s central bank has kept its interest rate at 21% to avoid excessive cooling in its economy.

Russia’s central bank has been hiking rates consistently in the second half of this year in an attempt to cool high inflation — but it may be running ahead of the curve.

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Bank lending has slowed, but there’s a risk that it’s “faster than necessary” in the fight to bring down inflation to Russia’s target rate, a central-bank official told Interfax on Tuesday.

Andrey Gangan, the director of the Central Bank of Russia’s Monetary Policy Department, told the news agency that bank interest rates on deposits and loans were rising faster than the central bank’s benchmark rate, slowing lending activity.

The development prompted the central bank to keep its benchmark interest rate at 21% on Friday. Analysts polled by Reuters had expected Russia’s central bank to hike its key rate to 23%.

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“Throughout December, we received increasing confirmation of tighter monetary conditions, culminating in Friday’s decision,” Gangan said.

Citing official data, Interfax reported that corporate bank lending grew 0.8% in November, down from 2.3% in October.

Lenders are planning to expand their loan portfolios at a lower level next year, Gangan said.

Putin called for a ‘balanced’ decision on interest rates

Gangan’s comments followed speculation that Russia’s central bank had been under pressure from President Vladimir Putin and the business community to hold back on rate hikes.

A day before the central bank’s meeting, Putin called for a “balanced” decision about the interest rate.

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Russia’s top central banker, Elvira Nabiullina, said at a press conference following Friday’s interest-rate announcement that she was worried about “excessive cooling” in the country’s overheated economy.

Despite the slowdown in bank lending that prompted Russia’s central bank to keep rates steady, inflation remains high, reflecting challenges in the country’s sanctions-hit economy.

Russia’s inflation rate hovered at about 8% in the year to November, compared with the target rate of about 4%, according to government figures.

Gangan told Interfax that full-year inflation was expected to be about 9.6% to 9.8%. Price raises are expected to peak in April 2025 before falling.

“The current price growth we are observing is the result of factors that have accumulated over most of this year,” he said.

But the central bank still needs to keep rates steady this time so that the slowdown in bank lending — which leads to economic cooling — would not be “faster than necessary for bringing inflation back to the target,” Gangan said.