As expected, Russia strongly raised interest rates to strengthen the ruble.

The Central Bank of Russia (CBR) on August 15 raised its key interest rate by 350 basis points to 12%, an emergency move designed to fight inflation and strengthen the ruble (RUB) after the value of the Russian currency hit its lowest level since the outbreak of fighting in Ukraine.

The extraordinary meeting of the CBR comes a day after the ruble plunged, breaching the 100-to-1-dollar level on August 14, hit by Western sanctions on Russia’s trade balance and soaring military spending. The ruble has lost nearly a third of its value since the start of the year and hit its lowest level in nearly 17 months.

In a commentary for the state news agency TASS published on August 14, Maxim Oreshkin, economic adviser to Russian President Vladimir Putin, blamed the weak ruble on “loose monetary policy,” adding that the Russian Central Bank has “all the necessary tools” to stabilize the situation and that he expects normalization to begin soon.

Hours after Mr Oreshkin’s comments, the CBR announced an emergency policy meeting, providing some support to the ruble. But as of 08:29 GMT on August 15, the ruble was still at 98.03 RUB to the dollar.

“Inflationary pressures are rising,” the CBR said in a statement on Aug. 15. “The decision is aimed at limiting price stability risks. The depreciation of the ruble is weighing on prices and inflation expectations are rising.”

World - As expected, Russia strongly raised interest rates to strengthen the ruble — People walk past the Central Bank of Russia (CBR) headquarters in Moscow, August 1, 2023. Photo: Daily Sabah

The last time the CBR made an emergency rate hike was in late February 2022, when it raised rates to 20% immediately after Moscow invaded Ukraine. The bank then gradually eased rates to 7.5% as inflationary pressures eased in the second half of 2022.

Since its last rate cut in September 2022, the CBR has kept rates unchanged but has also maintained a hawkish stance, finally raising them by 100 basis points to 8.5% at its July policy meeting this year. The CBR’s next policy meeting is scheduled for September 15.

Russia saw double-digit inflation in 2022. After slowing in the spring of 2023 due to that high base effect, annual inflation is now again above the CBR's target, and is still rising rapidly.

Official figures from the CBR last week showed that Russia’s annual inflation rate rose to 4.3% in July, from 3.25% in June. The CBR – which targets an inflation rate of 4% – now expects average inflation of 5-6.5% this year.

The Central Bank of Russia has removed the signal that it is ready to raise interest rates further, Sovcombank chief analyst Mikhail Vasilyev said, explaining that it was a sign that interest rates have peaked.

“We believe that the key interest rate will remain at the current level of 12% until the end of the year,” Mr. Vasilyev said. “A cycle of key interest rate cuts could come as early as next year, when inflation starts to slow down . ”

Minh Duc (According to Reuters, AP)

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