Ruble crash: Russia’s central bank raises interest rates drastically

Ruble crash: Russia's central bank raises interest rates drastically

In order to stop the ruble from falling, the Russian central bank has increased the key interest rate from 8.5 to 12 percent. The currency watchdogs announced this after a crisis meeting. The background to this is the slide in the national currency, which had slipped to its lowest level in almost 17 months against the dollar at the beginning of the week and had also lost sharply against the euro.

The next regular monetary policy meeting is not scheduled for September 15th. Apparently, the collapse of the ruble has now put the central bank under pressure. It had already signaled a rate hike for September.

Inflationary pressure is building up, the Reuters news agency quoted a statement by the Russian central bank as saying. “The decision aims to limit the risks of price stability.” Domestic demand is higher than the country’s economic output, and the increased demand for imports is affecting the ruble exchange rate. “Consequently, the pass-through of ruble depreciation to prices is gaining momentum and inflation expectations are rising,” the central bank said.

Kremlin and central bank at odds?

Recently there had been disagreements between the Kremlin and the central bank. Maxim Oreshkin, President Vladimir Putin’s economic advisor, has criticized loose monetary policy as the main reason for the weakening of the ruble and the acceleration of inflation.

The central bank, meanwhile, took the view that rate hikes would have no direct impact on the exchange rate. The president of the central bank, Elvira Nabiullina, blamed the deteriorating conditions for foreign trade for the ruble’s weakness.

Ruble reaction behavior

The monetary authorities have tried to cushion the economic impact of the Russian war against Ukraine and the Western sanctions on Russia with a flexible interest rate reaction. Just a few days after Russian troops invaded Ukraine at the end of February 2022, under the impression of the collapse in the ruble exchange rate, they had lowered the key interest rate from 9.5 percent to 20 percent. The interest rate was then lowered to 7.5 percent, most recently increased again for the first time on July 22 to 8.5 percent.

Even before the expected rate hike, the ruble had recovered somewhat from yesterday’s lows against the euro and the dollar. However, the currency cannot defend its higher level. In the winter of 2022, the ruble had already plummeted to as much as 130 to one to the dollar.

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