Following criticism from the Kremlin, the Russian central bank is bracing itself against the slide in the ruble with a sharp increase in interest rates. It decided Tuesday morning at an emergency meeting to raise the key interest rate to 12.00 from 8.50 percent. If the danger of inflation should increase, a further increase is possible, the currency watchdogs added in a message to the financial markets late in the morning. They reacted with the tighter course to the collapse of the national currency, which had slipped to its lowest level in almost 17 months against the dollar at the beginning of the week. The background is the Western sanctions against Russia, which are increasingly weighing on the trade balance. In addition, ever larger sums are being put into the military budget for the Ukraine war, which the government in Moscow calls a special military operation. Inflationary pressure is building up in Russia, the central bank said. “The impact of ruble depreciation on prices is gaining momentum and inflation expectations are rising,” the monetary authorities warned. They had already signaled an increase for the regular interest rate meeting in September, but were now obviously under pressure to act.
“As long as the war continues, it will only get worse for Russia, the Russian economy and the ruble,” says a financial expert. Pictured: The Russian central bank.
(Photo: Maxim Shemetov/Reuters)
Recently there had been disagreements between the Kremlin and the central bank. Maxim Oreshkin, President Vladimir Putin’s economic adviser, has criticized that loose monetary policy is the main reason for the weakening of the ruble and the acceleration of inflation. The Kremlin wants to see a strong ruble and expects it to normalize soon. The central bank, meanwhile, took the view that rate hikes would have no direct impact on the exchange rate. Central bank deputy governor Alexei Sabotkin said growing demand for imports coupled with subdued export development is putting the ruble under pressure. The ruble was down 0.4 percent at 98.05 against the dollar at midday. In anticipation of the decision by the central bank, it had risen by up to 5.2 percent to 92.60 against the dollar in the morning, but gradually reduced the price gains after the interest rate hike. The announcement that there could be another rate hike in September did not initially trigger a price reaction. Although the currency’s depreciation was initially halted, analysts were largely in agreement that the interest rate hike should not have any lasting effects. “As long as the war continues, things will only get worse for Russia, for the Russian economy and for the ruble,” said Timothy Ash of Bluebay Asset Management.