Russian central bank raises rates to 12% to aid struggling rouble.

MOSCOW ‍(Reuters) – ​Russia’s central bank took decisive action on ‌Tuesday, raising ‍its key interest rate by 350 basis points to 12% in an emergency move. This bold‌ step was ⁢taken in an effort to halt the recent slide of the rouble,‍ following a public call from the Kremlin for tighter monetary policy.

The ⁣extraordinary rate⁣ meeting ​came after the rouble plummeted past the 100 threshold against the dollar on Monday. The impact of Western sanctions on Russia’s balance of trade,‌ coupled with⁣ soaring military spending, has put ‌immense‌ pressure on the currency.

The rouble pared gains after the⁢ decision, remaining 0.5% weaker at 98.16 by 1056 GMT. However, this was still significantly ‍above the lows near 102 ‌on Monday, which had not been seen since the early weeks after Russia invaded Ukraine. ‍

President Vladimir ⁤Putin’s ​economic ⁣adviser, Maxim Oreshkin, publicly criticized ​the central bank, blaming its soft monetary policy for weakening the rouble. ​In⁢ response to Oreshkin’s words, the bank announced the emergency meeting, throwing the currency a ‍lifeline.

“Inflationary pressure is ‍building up,” the ⁤bank stated on Tuesday.

“The pass-through of the rouble’s depreciation to ‍prices is ‌gaining⁢ momentum and ‍inflation expectations are on the rise.”

While ‍this move ‍may temporarily slow‍ the pace ⁢of‍ depreciation, analysts⁤ largely agree that it will not have a long-lasting‍ impact. Timothy Ash, ‍senior EM sovereign strategist at Bluebay Asset​ Management, ⁢stated, “As long as the war continues, it just gets worse for Russia, the Russian ⁣economy, and the rouble. Hiking policy rates won’t solve⁤ anything​ – they might temporarily slow the pace of depreciation of the ​rouble at the price ‍of​ slower real‌ GDP‍ growth – unless the core problem, the war and sanctions, are resolved.”

ECONOMICS OR POLITICS?

In its original statement, the bank removed its usual hawkish guidance that it would ⁤consider future rate hikes, leading some analysts to ⁣speculate that interest rates had peaked. However, shortly after the decision, the bank ⁣issued an additional statement: “In ‍the case of strengthening pro-inflationary ‍risks, ⁤an additional increase in the key rate is possible.”

Central Bank Governor Elvira Nabiullina ⁣has received praise for her‌ handling‌ of the economy since Russia’s military operation in ⁣Ukraine⁢ began. However, the‌ plunging rouble ⁣and high inflation have put her on the back foot, especially among pro-war nationalists. The Kremlin’s public criticism of her monetary policy adds further pressure as Russia heads towards a presidential election in March 2024, with consumers battling rising prices for basic goods.

“While such a depreciation risks boosting inflation, it is ⁤also the signal it sends out to the Russian ‍public about the costs of the invasion of Ukraine,” said Stuart Cole, ​chief macro economist at Equiti Capital in London.

“As such, today’s decision will likely have had an element of politics behind it as ⁣well as economics.”

Andrei Melaschenko, economist at Renaissance Capital in Moscow, said the bank was ‌right to react to inflation risks, but⁤ the timing of the meeting, being‌ announced so soon after ⁤Kremlin criticism, raised questions about the bank’s independence.

“(Nabiullina) has built quite a strong⁣ team around her ​and the central bank has been a strong regulator and I think and the market, ⁤both the⁤ domestic and ​international ‍market, sees it that way.”⁢

INFLATION PRESSURE

The bank ‌last made ‌an emergency ‌rate hike in late February 2022, ⁤raising the rate to ⁣20% in ‍the immediate ⁤fallout ‍of ‌Russia’s dispatching ‌troops to Ukraine. Since then, the bank ⁤steadily lowered the cost of borrowing to 7.5% as inflation pressure eased in the second half of 2022. ⁤

However, ⁣since its ‍last cut in‌ September 2022, the ⁣bank has held rates but increased its hawkish rhetoric. It eventually hiked rates by 100 basis points‌ to 8.5% ‌at its last scheduled meeting in July.⁤ The next rate decision is⁢ due on ⁢Sept. 15.

Russia experienced double-digit inflation in 2022, and after‌ a deceleration in​ the spring of 2023 due to the high base effect, annual inflation is now above the central bank’s 4% target and quickening. ⁢

On a seasonally adjusted‍ basis, current price growth over the last three months​ averaged 7.6%, according to the bank.

Promsvyazbank ⁤analysts⁣ believe that an ‌additional rate hike may be ⁢necessary if the rouble does⁤ not ‌stabilize. They ⁤also suggest that​ measures to reduce the rouble liquidity surplus ‌are needed. ⁣

‘SLOW THE BLEEDING’

Russia’s widening budget deficit⁣ and stark labor shortage have contributed to rising inflationary pressure this year. However, it was the rapid slide⁣ of​ the⁤ rouble, from around 70 ‍against the dollar at the start of⁤ the year to over ​100 on Monday, that ​pushed the central bank to take action.

The bank, which attributes‍ the rouble’s‍ slide to Russia’s shrinking current account surplus​ (down 85% year-on-year‍ in January-July), has already attempted ⁤to ‍limit the currency’s decline. Last⁣ week, it⁣ halted‍ the finance ministry’s FX⁣ purchases in an effort to​ reduce volatility. This⁣ step effectively saw Russia abandon its ⁢budget rule. However, analysts⁤ widely agree that ​these measures ⁢alone ⁣were too minimal ⁤to significantly support​ the⁣ currency.

“Today’s rate hike will only temporarily slow the bleeding,” said Liam Peach, senior emerging markets economist at Capital ⁤Economics in London. ⁢

“Russia will struggle to attract capital inflows because of sanctions,” he added. “And⁣ there’s little ammunition for ⁢FX intervention – the central bank⁣ has ⁢some unfrozen renminbi assets and gold reserves, but the bar⁢ for using these is likely to be high.”

(Writing by Alexander Marrow; additional reporting by Marc Jones; editing by Guy Faulconbridge and Christina Fincher)

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