Russia holds key rate at 21% despite Putin request not to chill the economy

By Elena Fabrichnaya and Gleb Bryanski

MOSCOW, March 21 (Reuters) - The Russian central bank kept its key interest rate on hold at 21%, its highest level in more than 20 years, despite President Vladimir Putin's request not to chill the economy and loud complaints from business leaders.

The central bank raised its interest rate to 21% last October, its highest level since the early 2000s, in an effort to contain inflation, Russia's main economic challenge. In a statement on Friday the regulator said pressures persisted.

"Current inflationary pressures have decreased but remain high, especially underlying ones," the central bank said.

It added that its tight monetary policy could return inflation to its 4% target in 2026, but did not rule out considering another hike if the dynamics did not ensure that goal was reached.

The central bank stunned analysts last December when it unexpectedly kept the key interest rate on hold instead of an expected hike, following Putin's call for a "balanced" decision, which was made one day before the board meeting.

Putin on Tuesday urged his economic officials not to freeze the Russian economy as if it were in a "cryotherapy chamber" with its tight monetary policy.

Some analysts said that heeding Putin's advice on Friday could have made the regulator look weak and raised questions about its independence even if there were some grounds for a rate cut.

"Imagine if the regulator decides to lower the rate for well-founded reasons, it might still encounter criticism. People might say, 'No-one expected a decrease, but the president had mentioned it beforehand'," said Dmitry Polevoy of Astra Asset Management.

LIE DETECTOR

All 29 analysts who participated in a Reuters poll conducted earlier this week predicted that the regulator would keep its benchmark interest rate on hold, with many expecting softer rhetoric and hints at the timing of a future cut.

"The signal has become softer, although not as much as the market expected," said Alfa Bank's Natalya Orlova after the decision.

The central bank warned the government not to exceed spending targets this year after a three-year spending surge on the defence sector and military action in Ukraine.

"Changes in the fiscal policy parameters may require an adjustment in the monetary policy pursued," the regulator said.

Many Russian business leaders openly oppose the central bank's policy and argue that it is stifling the economy and investment.

"We are waiting for signals of a decrease — this is critical for investment and overall economic growth," said Kirill Dmitriev, CEO of Russia's sovereign wealth fund and Putin's envoy on international economic cooperation.

Hawkish state TV host Vladimir Solovyov had added to the pressure on the central bank in his widely watched show on Sunday, calling for its top management to be subjected to a lie detector test to determine whether they loved their country.

STRONG ROUBLE

The central bank forecasts that economic growth will fall to 1-2% in 2025 from 4.1% in 2024 as a result of its monetary policy, while the government expects the economy to grow by 2.5% in 2025.

Weekly inflation, an important gauge closely monitored by the central bank, slowed to the lowest level since the start of the year, according to the latest data. Meanwhile, the annual inflation rate also slipped slightly but remained above 10%.

Inflation expectations among Russian households for the year ahead, another important factor considered by the board, were also at their lowest level since August 24, 2024. The central bank's inflation target is 4%.

The regulator said key inflationary risks are linked to economic overheating, high inflation expectations and deteriorating foreign trade conditions as a result of sanctions.

The rouble, which has rallied by up to 28% this year on expectations of easing tensions between Russia and the United States and a peaceful settlement in Ukraine, is also helping to combat inflation as it makes imported goods cheaper.

"The current price growth in February and early March was partly constrained by a stronger rouble since the beginning of the year," the central bank said, adding that easing geopolitical tensions could also have a disinflationary effect.