Russia raises interest rate to 12% as sliding ruble bites hard
Ruble slumps
In a bid to halt the rapid depreciation of its ruble currency against the dollar, Russia’s central bank jacked up the interest rates by 350 basis points to 12 per cent at an emergency meeting on Tuesday (Aug 15).
It came as the ruble breached the 100 threshold against the dollar on Monday as Western sanctions and rising military spending due to the invasion of Ukraine tooka toll on the economy.
The bank’s response came after President Vladimir Putin's economic adviser Maxim Oreshkin in an op-ed in Russian state-owned Tass agency rebuked the central bank’s “loose monetary policy” for plunging currency and the acceleration of inflation.
Hours after Oreshkin's remarks, the bank announced the emergency meeting, throwing the currency a lifeline.
"Inflationary pressure is building up," the bank said in a statement on Tuesday.
"The pass-through of the rouble's depreciation to prices is gaining momentum and inflation expectations are on the rise."
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The central bank said that the decision was aimed at “limiting price stability risks” as “inflationary pressure is building up.”
Inflation at 4.4%
The annual inflation stood at an annual 4.4 per cent for the first seven days of August, but the Bank of Russia said that the inflation may edge up further as the current price growth over the last three months is averaging at an annualised 7.6 per cent on a seasonally adjusted basis. Core inflation over the same period rose to 7.1%.
“Steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has an impact on the ruble’s exchange rate dynamics through elevated demand for imports,” the central bank’s board said.
The central bank said that its decision was aimed at “shaping monetary conditions and overall domestic demand dynamics necessary to bring inflation back to 4 per cent in 2024 and stabilise it close to 4 per cent further on.”
The last time the bank raised the interest rate was in late February 2022 when Russia invaded Ukraine. That time, it raised the interest rate to 20 per cent. Later on, the bank steadily lowered the cost of borrowing to 7. Per cent % as strong inflation pressure eased in the second half of 2022.
Since its last cut in September 2022, the bank had held rates but steadily increased its hawkish rhetoric, eventually hiking by 100 basis points to 8 per cent at its last scheduled meeting in July. The next rate decision is due on September15.
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