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Russia Maintains Key Rate at 21% Despite Putin's Call to Avoid Economic Slowdown

The Russian central bank maintained its key interest rate at 21%, the highest level in over two decades, despite President Vladimir Putin's request to avoid stifling the economy and significant complaints from business leaders.

Last October, the central bank raised the interest rate to this level to address inflation, which remains Russia's primary economic challenge. In a statement, the regulator indicated that inflationary pressures are still prevalent.

Current inflationary pressures have decreased but remain high, particularly in underlying areas. The central bank expressed confidence that its stringent monetary policy could bring inflation back to its 4% target by 2026 but did not exclude the possibility of another rate hike if necessary.

In December, the central bank surprised analysts by holding the key interest rate steady instead of increasing it, following Putin's call for a balanced approach just before the board meeting. Putin recently urged economic officials to avoid freezing the economy amid tight monetary policies.

Some analysts noted that responding to Putin's advice could undermine the regulator's credibility and autonomy, even if a rate cut could be justified. Dmitry Polevoy from Astra Asset Management remarked that if the regulator were to lower the rate for valid reasons, it might still face backlash.

All 29 analysts surveyed in a recent poll expected the central bank to maintain its benchmark interest rate, with many anticipating softer language and hints about future cuts. Alfa Bank's Natalya Orlova commented that the signals had softened, though not as much as the market had anticipated.

The central bank also cautioned the government against exceeding spending targets this year after significant expenditures on defense and military operations in Ukraine over the past three years. Changes to fiscal policy may necessitate adjustments in monetary policy.

Many Russian business leaders oppose the central bank's approach, arguing it hampers economic growth and investment. Kirill Dmitriev, CEO of Russia's sovereign wealth fund, emphasized the need for signals indicating a rate decrease to stimulate investment.

Pressure on the central bank increased with hawkish state TV host Vladimir Solovyov's call for management to undergo lie detector tests to prove their patriotism on his widely viewed show.

The central bank predicts that economic growth will decline to 1-2% in 2025, down from 4.1% in 2024, as a consequence of its monetary policy, while the government anticipates a growth rate of 2.5% for 2025.

Weekly inflation, a key metric for the central bank, has slowed to its lowest level since the start of the year. Meanwhile, the annual inflation rate has decreased slightly but remains above 10%. Household inflation expectations for the coming year have also reached their lowest point since August 2024, with the central bank targeting 4%.

Key inflationary risks include economic overheating, high inflation expectations, and worsening foreign trade conditions due to sanctions. The rouble, which has strengthened by up to 28% this year amid expectations of improved relations with the United States and a peaceful resolution in Ukraine, is also aiding in curbing inflation by making imports cheaper.

The central bank noted that recent price growth in February and early March was partly restrained by the stronger rouble and that easing geopolitical tensions could further contribute to disinflation.