Russia’s central bank on Friday raised its interest rate by 100 basis points to 6.5 per cent – its biggest increase since a 2014 currency crisis – as the country battles soaring food prices.

The Russian economy was hard-hit by the coronavirus pandemic and the 2020 oil price crisis, and authorities are under pressure following a leap in prices for staple goods such as sugar, sunflower oil and eggs. 

“Inflation is developing above the Bank of Russia’s forecast,” it said in a statement, adding that the increase in its key rate aimed to “constrain this risk” and return inflation to 4.0 per cent.

According to the bank’s estimates, the Russian economy reached its pre-pandemic level in the second quarter of 2021. However, the “steady growth in domestic demand exceeds production expansion capacity in a wide range of sectors,” the bank added. As a result, “businesses find it easier to transfer higher costs to prices”.

The “steady growth in domestic demand exceeds production expansion capacity in a wide range of sectors”. As a result, “businesses find it easier to transfer higher costs to prices”- Bank of Russia

Friday’s rate hike is the highest since Russia was hit in 2014 by a fall in oil prices and Western sanctions following Moscow’s annexation of Crimea. That year the central bank abruptly raised its key rate to more than 17 per cent.

After months of historically low inflation, consumer prices began climbing in March 2020, driven by a drop in the ruble’s value. The central bank started raising its historically low rate the same month. 

In June, Russian annual inflation remained high at 6.5 per cent according to the state statistics agency, the highest level since 2016 and well above a bank forecast of 4.0 per cent. The bank’s next monetary policy meeting is set for September 10.