Russia's central bank has left its benchmark interest rate at a record 21%, holding off on further increases despite high consumer inflation fueled by the Kremlin's war against Ukraine.
The decision Friday comes amid criticism from influential business figures, including tycoons close to the Kremlin, that high rates are putting the brakes on business activity and the economy.
And it underlines the ongoing friction in the economy between military spending and stable prices for consumers.
Central Bank of Russia Gov. Elvira Nabiullina said that lending to companies had tightened more than expected due to the October rate hike that brought the benchmark to its current record level. The central bank held open the possibility of an increase at its next meeting and said inflation was expected to fall to an annual 4% next year from its current 9.5%.
Factories are running three shifts making everything from vehicles to clothing for the military, while a labor shortage is driving up wages and fat enlistment bonuses are putting more rubles in people's bank accounts to spend. All that is driving up prices.
On top of that, the weakening Russian ruble raises the prices of imported goods like cars and consumer electronics from China, which has become Russia's biggest trade partner since Western sanctions disrupted economic relations with Europe and the U.S.
Russia's military spending is enabled by oil exports, which have shifted from Europe to new customers in India and China who aren't observing sanctions such as a $60 per barrel price cap on Russian oil sales.
High interest rates can dampen inflation but also make it more expensive for businesses to get the credit they need to operate and invest.
Critics of the central bank rates and of Nabiullina have included Sergei Chemezov, the head of state-controlled defense and technology conglomerate Rostec, and steel magnate Alexei Mordashov.
Russian President Vladimir Putin opened his annual news conference on Thursday by saying the economy is on track to grow by nearly 4% this year and that while inflation is "an alarming sign," wages have risen at the same rate and that "on the whole, this situation is stable and secure."
Putin acknowledged there had been criticism of the central bank, saying that "some experts believe that the Central Bank could have been more effective and could have started using certain instruments earlier." Asked what decision the Central Bank was going to make on the rate, Putin said that Nabiullina didn't tell him what the rate will be. "She may not know it herself yet as they discuss it during the board meeting and make the final decision during discussion," he said. "I hope that the decision will be well-balanced and conform to today's needs."
Putin is in a difficult situation because he needs to keep the economy growing and ensure social stability, said Alexander Kolyandr, senior fellow at the Center for European Policy Analysis. "And inflation is not a good recipe for keeping society stable. On top of that he needs to wage his war, and there are not enough resources in the state to meet all three" goals - growth, stable prices, and military spending.
Nabiullina "doesn't care much about pressure from business people," Kolyandr said. "She is quite independent and she knows that she has Putin behind her. But the overall slowing down of the economy definitely played a role."
The central bank has in the past month turned to other ways of tightening lending to cool inflation such as by imposing stricter credit standards and regulatory requirements on banks. "Whether that was successful or not, we'll see next year. But for the moment it gave Nabiullina an opportunity to keep the rate unchanged, to please the industrialists, politicians and President Putin himself, and just sit and wait.
"I think the chances of the rate going up at the next meeting are pretty high."