Russia's Central Bank raises key interest rate to 18% as inflation soars

Russia's Central Bank on Friday raised its key lending rate to its highest level in more than two years to stem soaring inflation in an overheated economy hit by Western sanctions in response to Moscow's military action in Ukraine.

The bank raised the rate by 200 basis points to 18.00%, noting that inflation has accelerated and is developing significantly above its forecast.

Growth in domestic demand is still outstripping the capabilities to expand the supply of goods and services, the bank said in a statement. For inflation to begin decreasing again, monetary policy needs to be tightened further.

It noted that inflationary risks have been driven by high inflation expectations and changing trade terms as a result of geopolitical tensions, a reference to Western sanctions against Russia over its action in Ukraine.

It said annual inflation grew from 8.6% in June to 9.0% in July, reflecting an increase in utility costs that took effect starting this month.

The bank revised the inflation forecast for this year to 6.5 to 7% and said it might consider further increases in the key rate at its upcoming meetings. It noted that returning inflation to the 4% target requires considerably tighter monetary conditions than presumed earlier.

Raising interest rates is intended to impede inflation by increasing the cost of borrowing and encouraging savings.

Inflation has soared amid high consumer activity driven by a significant increase in household incomes and substantial investment demand supported by both fiscal incentives and high profits of businesses, the bank observed.

Amid continuing labor shortages, the growth in domestic demand doesn't result in a proportional expansion of the supply of goods and services, intensifying inflationary pressures, it added.