Russia increases policy interest rates to 8%

The Russian central bank has raised their main policy interest rate by 0.5% to a new level of 8% in a bid to control inflationary pressures in the Russian economy.

One of the main reasons for the rise has been to curb the possible outflow of financial capital from the country as investors get increasingly nervous about more stringent sanctions being imposed on Russia in the wake of their alleged involvement in the shooting down of the MH17 airliner.

Capital outflows would cause the Russian rouble to depreciate leading to an increase in costs and prices of imported products.

The danger is that a sharp rise in interest rates may lead to a deeper slowdown in Russian real GDP growth. Russian national output has been weak in recent months.

Inflation in Russia has been persistently higher than the average for the European Single Currency Bloc for many years although consumer price inflation has been on a downward trend compared to the years before the Global Financial Crisis.

The International Monetary Fund (IMF) argued in a report issued in early July 2014 that deeper structural reforms were critical to improving Russia's growth prospects. These reforms including addressing low productivity in state-owned enterprises and considerable corruption.

The IMF is forecasting real GDP growth for Russia at just 0.2 percent in 2014 with considerable downside risks.

"Russia's growth model based on energy exports with increasing oil prices and use of spare capacity is no longer reliable and that there is need to move to a new model."