Receive Russian economic updates for free
we will send you myFT Daily Digest Email summary of the latest information Russian economy Every morning there is news.
Russia’s central bank raised its key interest rate by 3.5 percentage points to 12% at a special meeting after the ruble fell below 100 per dollar.
The currency strengthened ahead of and immediately after Tuesday’s sharp rate hike, rising more than expected, before paring some gains to trade at 98 rupees against the dollar.
The ruble tumbled, falling as low as 102 against the dollar on Monday, underscoring unease about Russia’s economic outlook nearly a year and a half after President Vladimir Putin’s all-out invasion of Ukraine.
The country’s economic policymakers are struggling to balance economic growth and the competing demands of steering the economy through Western sanctions while keeping the ruble stable.
But the central bank said further rate hikes may be needed to stabilize the currency “if inflation risks intensify”, and many analysts see excess ruble liquidity as the main factor driving up imports and thus price pressures.
You are seeing a snapshot of the interactive graph. This is most likely due to your browser being offline or JavaScript disabled.
After Russia fell into recession last year, fueling the country’s recovery and financing Putin’s war machine required borrowing heavily at low interest rates that fueled inflation while weakening the ruble.
The central bank said it decided to “limit price stability risks” after some measures of inflation rose above 7 percent. But it added that increased pressure on the ruble was driving inflation expectations.
“Increases in internal demand outweigh the possibility of expanding the (money) supply, exacerbate persistent inflationary pressures and affect the dynamics of the ruble exchange rate by increasing import demand,” the central bank said.
It said further price increases would pose a “significant risk” that Russia would miss its target of reducing inflation to 4 percent next year, and argued that rate hikes would help it achieve that goal.
The central bank, which abandoned its currency target in 2014 and moved to a free float, said decisions on whether to raise rates further would be based on inflation data and Russia’s success in accommodating Western sanctions and other internal and external “risks”. .
Analysts at Russian investment bank Sinara wrote: “In our view, the decision to raise interest rates higher than market expectations indicates that the tightening cycle will end soon.”
Sofia Donets, chief Russia economist at Renaissance Capital, a Moscow-based investment bank, said: “More time is needed to discuss a sustainable (ruble) stabilization and appreciation trend. This rate hike is obviously not good for Russian economic growth, but it should be able to well curb inflation risks.”
Russian policymakers have few tools at their disposal to support a fall in the ruble after Western countries froze about $300 billion in Russia’s foreign-exchange reserves last year, leading to the central bank’s reluctance to boost the ruble by selling dollars and euros.
Last week, the central bank said it would stop buying foreign currency by the end of the year to “reduce volatility”.
A key reason behind the ruble’s depreciation is Russia’s shrinking current account surplus, which fell by 85% year-on-year in the first seven months of 2022.
Russia’s loose monetary policy has funded ballooning military spending and social programs such as mortgage subsidies or grants for soldiers’ families.
While the toolkit has helped spur growth, the sanctions-induced drop in export earnings has widened Russia’s budget deficit and made the country more reliant on imports — a factor that drives up inflation.
Export earnings have remained low despite higher oil prices in July, not only because of price caps in the West, but also because exporters are not repatriating a significant portion of their foreign exchange earnings.
By then, an unprecedented 40% of Russia’s June exports were denominated in rubles, putting pressure on the exchange rate.
“Measures are also needed to reduce excess ruble liquidity,” Denis Popov, chief analyst at Russia’s state-owned Promsvyazbank, wrote in a note.
Analysts said the central bank’s decision would not have a major impact on the ruble.
“There will be some lag in the transmission of the rate adjustment mechanism to the exchange rate and it may not be a quick fix for stabilizing the exchange rate,” said Natalia Lavrova, chief economist at BCS Global Markets.
Central bank Governor Elvira Nabiullina has prioritized economic stability through a hawkish inflation policy during her decade in charge, but she has faced rare criticism from authoritarian hardliners as the ruble has slumped. Criticize publicly.
But with the Kremlin unwilling to cut social or military spending, Russia’s options to stop the ruble from falling are limited to non-market mechanisms such as capital controls.
Konstantin Sonin, a professor at the University of Chicago, said the central bank could take more unorthodox measures if it chose.
“The arsenal of financial repression was essentially endless. What stopped them? The possibility of a black market might arise. In the Soviet Union, people could buy dollars to travel abroad or to shop in ‘premium’ stores that sold goods in dollars, but It’s expensive – including the risk of arrest.”
Svlook
