Russian central bank sharply raises inflation forecast

Russia’s central bank sharply raised its inflation forecast for 2025 on Friday, saying there was no sign of a slowdown in soaring prices.

Inflation has been rising rapidly across the Russian economy for months, driven by massive government spending on the war in Ukraine and widespread labor shortages.

Prices are now expected to rise by 7 to 8% this year, compared with a previous forecast for 2025 of 4.5 to 5%, the central bank said in a statement.

The new forecast comes despite a rally in the ruble this week following a phone call between US President Donald Trump and Russian President Vladimir Putin that raised hopes of a thaw in US-Russian relations.

The central bank also kept borrowing costs at a two-decade high of 21% on Friday, despite complaints from companies and banks that higher benchmark interest rates are hurting economic growth.

Price pressures remain high, central bank governor Elvira Nabiullina said at a news conference after the interest rate announcement.

Nabiullina warned that rapid price increases would continue despite a “slight slowdown” in inflation data from January and February.

“We are not yet talking about a shift in direction,” she said.

Russia spends about 9 percent of its GDP on defense and security, according to Putin, and military spending is set to rise by about 30 percent again in 2025.

This spending has inflated the size of the Russian economy, partly offsetting the effects of Western sanctions.

But because much of the spending is directed by the state, which is less responsive to higher borrowing costs, analysts say higher interest rates may not be an effective tool for reducing inflation.