Moscow hikes rate to 17 per cent to halt ruble's tumble
Moscow (AsiaNews/Agencies) - As the ruble's freefall against the euro and dollar continues, the Bank of Russia hiked the main interest rate to 17 per cent from 10.5 per cent, effective today.
This is the largest single increase since 1998, when Russian rates soared past 100 percent and the government defaulted on debt.
"This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks," the central bank said in the statement.
Last Thursday, the bank had already raised rates by 1 point to 10.5% without achieving the desired results.
Dubbed "Black Monday", yesterday's plunge saw the Russian currency trade above 78 against the euro and 63 against the dollar. In the previous four weeks, the currency had lost almost 50 per cent of its value.
Now Russia's central bank expects the economy to contract by 4.8 per cent in 2015 if oil remains at current levels. By contrast, inflation is expected to reach 11.5 per cent.
When markets opened this morning, the ruble gained a bit against the US currency but then fell back again, reaching another low against the euro at 79.25.
Some economists told RBC news that the decision by the Bank of Russia could bring the ruble to stabilise at 60 against the dollar.
However, for Nizam Idris, from the Macquarie investment group, this will not do much to deal with the fundamental weakness of the Russian economy, namely the collapse of oil prices and sanctions. Any sharp rise in interest rates in the future will damage the economy.
The drastic measure by the Bank of Russia shows how bad Russia's stricken economy is. If new higher rates continue they will squeeze an economy that is already hurt by US and EU sanctions, and by a collapse in oil prices.
They would also undermine President Putin's pledge for greater business openness and incentives in his state of the nation address.
"This move symbolizes a surrender of economic growth for the sake of preserving the financial system," said Ian Hague, from New York-based Firebird Management LLC.
In 2014, the Russian currency lost over 45 per cent of its value against the dollar (42 per cent against the euro), a sharp loss that brought back memories of 1998, when the decline in the ruble sent shockwaves across world markets.
Since then, Moscow has failed to modernise the economy, postponing needed reforms. In fact, as Bloomberg recently reported, the Kremlin continues to reward its "friends" with public contracts and other deals.
With revenues dropping, funds for innovation and development, special economic zones and small businesses have been cut in the last budget, whilst military spending has gone up by 30 per cent.
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