Russian central bank raises interest rates to 12% in a bid to stabilize the falling ruble.

Russian central bank raises interest rates to 12% in a bid to stabilize the falling ruble.

Russia’s Central Bank Raises Interest Rates to Support the Ruble

Introduction

In a bold move to counter the sharp decline of the ruble, Russia’s central bank announced an emergency interest rate hike on Tuesday. Policymakers held a meeting to address the sudden plunge of the currency, which has reached a 16-month low. The Bank of Russia, in a statement, revealed that interest rates would be raised by 350 basis points to 12%, the highest level in over a year. This decision comes amid concerns about the weakening ruble and a significant acceleration of inflation.

The Ruble’s Fall and the Central Bank’s Response

The ruble experienced a significant decline, reaching nearly 102 against the dollar on Monday. This prompted Moscow to publicly criticize the central bank for its handling of the situation. Maxim Oreshkin, an economic advisor to President Vladimir Putin, published an op-ed in which he blamed the ruble’s weakening and the acceleration of inflation on the central bank’s “soft monetary policy.” In response to Oreshkin’s criticisms, the Bank of Russia took immediate action and called an emergency meeting.

The Emergency Interest Rate Hike

At the emergency meeting, the central bank voted to raise interest rates for the second consecutive month. This decision was aimed at stabilizing the ruble and addressing concerns about inflation. The interest rates were increased by 350 basis points, bringing them to 12%. This is the highest level since the period just after Putin’s invasion of Ukraine. The central bank’s response to the ruble’s decline led to a positive immediate effect on the currency, with the ruble strengthening by approximately 1% against the dollar.

Ruble’s Performance and the Economic Landscape

Despite the ruble’s slight recovery following the interest rate hike, it remains one of the worst-performing currencies in 2023. The currency has plummeted by approximately 36% this year, as reported by Refinitiv. This significant decline reflects the deteriorating terms of trade for Russia. The country’s current-account surplus suffered a 93% collapse, falling from a record $76.7 billion in the April-June quarter of the previous year to only $5.4 billion in the same period this year. It is evident that Western sanctions, in response to Russia’s involvement in the conflict with Ukraine, have severely impacted the economy by squeezing its energy exports.

Conclusion

The Bank of Russia’s decision to raise interest rates demonstrates its commitment to restoring stability to the Russian economy and supporting the ruble. This emergency measure comes amidst concerns about the currency’s rapid decline and increasing inflation. While the ruble has shown a modest recovery after the interest rate hike, it remains one of the worst-performing currencies of the year. The challenging economic situation facing Russia is a result of Western sanctions and the significant impact they have had on the country’s terms of trade. It will be crucial to monitor how these developments unfold and if further measures will be required to bolster the economy and stabilize the ruble.

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