(Bloomberg) -- Russia extended its interest-rate pause to the longest in more than seven years as the central bank becomes increasingly alert to inflation risks at a time of heavy government spending on the war in Ukraine.

Policymakers on Friday kept their benchmark at 7.5%, where it’s been since September, in a decision that matched the forecasts of most economists surveyed by Bloomberg. The central bank also delivered a hawkish message that signaled higher rates are probably on the way.

“Since our April meeting, pro-inflationary risks have gone up, which means that the likelihood of a key rate increase has also grown,” Governor Elvira Nabiullina said in televised comments. “We allow for the possibility of its increase at the next meetings.”

Inflation is close to ending an uninterrupted decline that started a year ago and brought it well below the central bank’s target of 4%. But despite long warning of severe labor shortages and the threat posed to prices by surging budget expenditure, Nabiullina can probably afford to wait as inflation just starts to show signs of acceleration.

Official borrowing costs haven’t changed since the central bank ended its steep monetary easing cycle that more than reversed an emergency hike after the invasion of Ukraine more than 15 months ago.

The turns of policy over the past year echo the experience in 2015-2016, when the Bank of Russia paused for six meetings after unwinding the rate increases it delivered in response to a crash in oil prices and the first rounds of sanctions following the annexation of Crimea from Ukraine.

What Bloomberg Economics Says...

“There’s been a shift in the Bank of Russia’s guidance: instead of signaling that the central bank continues to assess inflation risks, it now plainly states it’s ready to raise interest rates. We agree — an increasingly hot labor market and a softer currency will drive inflation above the central bank’s target of 4% by August. We expect interest rates to be lifted to 8% by the end of 2023 either in one go or in 25-basis-point increments.”

—Alexander Isakov, Russia economist. For more, click here

Evidence is starting to emerge that inflation is picking up. On a weekly basis, price growth jumped from near zero to 0.2% in the seven days ended June 5. Inflation expectations for a year ahead, a key factor for policymakers, rose in May for the first time in three months.

Analysts at the Bank of Russia have continued to warn that price pressures could be on the rise, pointing to factors ranging from faster wage growth to a revival in consumer lending. “The overall balance of inflation risks has tilted even more to the upside,” the central bank said in a statement accompanying its latest decision.

On Friday, policymakers also said economic activity is improving faster than expected, thanks in large part to “a strong rebound in domestic demand.” But they also warned of a drag on growth from a dearth of workers caused by the Kremlin’s call-up of men to fight in Ukraine.

“The current capacity to expand production in the Russian economy is increasingly limited by labor market conditions,” it said. “Labor shortages are increasing in many industries amid the effects of the partial mobilization.”

Domestic demand is increasingly a dominant factor driving inflation, meaning it could soon warrant a response by monetary policymakers, according to Natalia Lavrova, chief economist at BCS.

The latest “signal sounds tougher,” she said. “This points to an increasing likelihood of a rate hike at the next meeting in July, if inflationary growth proves to be sustainable.”

(Updates with Nabiullina’s comment in third paragraph.)

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