The Russian central bank has raised rates to 10.5% from 9.5% in its latest attempt to halt the collapse of the rouble. The currency has been hit by a combination of collapsing oil prices, which the country’s economy is heavily dependent on, and Western sanctions over Russia’s role in supporting anti-government rebels in Ukraine.
So far the move has not had the intended effect. The rouble dropped to a new low of more than 55 roubles to the dollar following the announcement.
The central bank has tried to use shock tactics before to limited effect. At the end of October it raised rates to 9.5% from 8% in a widely unexpected gamble that higher rates would halt the rouble’s slide against the dollar and the euro. But while the economic outlook certainly declined as expected, the move failed to prevent the rouble from sliding further as oil prices continued to slump.
As you can see from the chart below, the rouble’s falls against the dollar (orange line) have closely tracked drops in the price of oil (green line):
Market analysts were forecasting a hike of the central bank’s key interest rate of 9.5% by anything from 25 basis points to as much as 250 basis points, according to The Wall Street Journal. That is, people expected anything from 9.75% to 12%.
Inflation in Russia hit 9.4% last month as sanctions on imports and the collapsing rouble drove up prices in the country — well above the central bank’s target of 5.5% for 2014. The Bank of Russia forecasts that inflation may exceed 10% in the first quarter but is expected to decline after that.
The rate of price rises and ongoing falls in the value of the currency have put pressure on the central bank to increase interest rates to slow the pace of spending in the economy by encouraging people to save more of their money. However, doing so risks worsening the already parlous state of Russia’s economy, which is expected to fall into a recession next year.
After growing at an average pace of about 6.9% between 1999 and 2008 Russia has struggled to regain its momentum since the Great Recession. According to the Bank of Russia, the annual GDP growth rate in 2014 was 0.6%, with the central bank forecasting growth would remain close to zero between 2015 and 2016 (though, if the Economic Development Ministry prediction of a 0.7% contraction next year is right, close to zero here could mean a mild recession).
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