Russian central bank holds key rate steady ahead of election

By Elena Fabrichnaya and Gleb Bryanski

MOSCOW, Sept 11 (Reuters) - Russia's central bank held its benchmark interest rate at 14% on Friday, one week before a parliamentary election the Kremlin will watch closely as a gauge of public anxiety and fatigue after 4-1/2 years of war in Ukraine.

The $2.6 trillion economy slowed sharply last year and is expected to grow just above zero in 2026, weighed down by the high key rate, Western sanctions, Ukrainian strikes on economic targets and a strong rouble.

The rate hold matched analysts' expectations in a Reuters poll.

"The economy as a whole is growing at a moderate pace in the third quarter of 2026. Current price pressures have increased significantly in recent months," the central bank said in a statement.

Businesses have pressed the bank to cut rates, arguing that borrowing to invest makes little sense at current levels and that growth won't resume until the key rate falls below 12%. The bank countered that investment is recovering compared with the start of the year, even at current rates.

REDUCTION IN PRODUCTION CAPACITY

Russia and Brazil hold the highest benchmark rates among the BRICS group of major developing economies, whose leaders, central bank chiefs and finance ministers are set to meet in New Delhi this weekend.

Inflation, which had eased earlier in the year, rose again in June after drone attacks on refineries triggered fuel shortages and price spikes — pushing up costs across the economy through higher transport expenses.

The central bank pointed to Ukrainian strikes on refineries as key drivers of price growth, calling them "the impact of a temporary reduction in production capacities in certain sectors."

The budget deficit — which the bank flagged as a pro-inflationary factor — narrowed to 2.5% of GDP in August from 2.8% the month before, helped by a dividend injection from state-owned bank stakes.

It could shrink further still: Global oil prices have climbed back above $100 amid the unresolved U.S.-Iran conflict, and as a major oil producer, Russia's budget benefits from higher crude prices.

HIGHER OIL PRICES

Although a fuel-price protection tax mechanism may help limit how much that translates into domestic inflation, the central bank is expecting higher oil prices to have a growing impact on inflation through imported goods.

"As the situation there remains tense for longer, the inflationary impact of the Middle East situation on the global economy and, through it, on Russia, is gradually increasing," First Deputy Governor Alexei Zabotkin told a news conference.

With the deficit already exceeding its annual target, the government has opted against the kind of pre-election spending spree it pursued ahead of the 2021 parliamentary vote and the 2024 presidential election.

Nabiullina said that projections in the new budget, including the adjusted figures for this year, which the government is drafting this month, will be a major factor for its next monetary policy decision at a meeting on October 23.

The rouble — whose strength had been helping the bank curb inflation by keeping import costs down — weakened 17% from its May 20 peak before beginning to recover this week on the back of rising oil prices.

(Editing by Mark Trevelyan, Vladimir Soldatkin and Hugh Lawson)