MOSCOW: Russia’s central bank raised its main interest rate much more than expected Friday, trying to tackle a sliding ruble and climbing inflation, as plunging global oil prices and Western sanctions hurt the economy.
However, the bank said that it had not changed its ruble exchange rate intervention policy, confounding speculation that it might use Friday’s meeting to announce changes that would have enabled a stronger defense of the ruble.
The 1.5 percentage point increase, which takes the one-week minimum auction repo rate to 9.5 percent, compares with analysts’ forecasts of a 0.5 rise in a Reuters poll this week.
The decision of Russia’s central bank (CBR) brings the cumulative increase this year to 4 percent, despite the economy’s weakness.
“This represents a pretty bold move by the CBR to regain the initiative, having been faced with a collapse of their currency,” said Neil Shearing, chief emerging markets economist at Capital Economics. “The question is will it work?”
“I expect the market will keep testing the central bank. A consequence of this will be continued ruble weakness.”
In a separate statement, the bank said it had not changed its exchange rate intervention policy, which involves keeping the currency within a nine-ruble-wide band against a dollar-euro basket. The bank plans to scrap the band at the end of this year when it floats the ruble.
There had been some speculation that the bank might use Friday’s meeting to scrap the band ahead of schedule, or to bring in a more discretionary policy that would enable bigger interventions.
“My concern is that the pressure on the ruble that we saw before this was hardly the result of interest rates’ being too low,” VTB Capital economist Vladimir Kolychev said. “I very much want to believe that this [rate rise] will help the ruble. If not, then the central bank will have to change its exchange rate policy.”
The central bank has been under pressure to raise rates to defend the ruble, which has shed around 20 percent against the dollar since mid-year due to falling prices of oil, a major export earner, and the sanctions imposed over Russia’s actions in Ukraine.
The move appeared to do little to buttress the Russian currency, even though higher rates should make it more attractive to hold deposits and other instruments in rubles. At 12:32 GMT the ruble was down 3.1 percent on the day against the dollar at 42.92, doubling its loss compared with at the time of the rate decision.
The ruble had already been well down Friday, following a surprise 3 percent rally Thursday that traders had linked to rumors over an agreement between Russia and Ukraine over Crimea, which Moscow annexed in March.
While no agreement over Crimea has materialized, Ukraine, Russia and the European Union signed a deal Thursday under which Moscow will resume gas supplies to its ex-Soviet neighbor.
Standard Bank analyst Timothy Ash said that Friday’s rise would probably not be enough.
“Market reaction suggests that they will need to do more – which could well push the Russian economy formally into recession,” he said in a note to clients.
“Long term it is unlikely to stop the rot, given the underlying drivers for rouble weakness which the rate hike does not help ... structural weaknesses in the economy, sanctions, strains in the relationship with the West, and lower oil prices.”
In an earlier statement explaining its rate decision, the central bank said annual inflation in September and October had increased more rapidly than expected, reaching 8.4 percent as of Oct. 27. It expected inflation to remain above 8 percent until the end of the first quarter of 2015.
The bank also cited “significant changes in external conditions,” since its last rates meeting Sept. 12, referring to a “considerable fall in oil prices and stricter sanctions imposed by certain countries against several large Russian companies.”
The bank said that higher inflation was the result of the weaker ruble, as well as Russian counter-sanctions that have banned the import of many Western food products. It expected inflation to decline as the economy gradually adjusts to these factors, but this would be slower than previously expected.
“If external conditions improve, and a persistent trend for lowering inflation and inflation expectations emerges, the Bank of Russia will be ready to start to ease its monetary policy,” the bank said in its statement.
The bank also said it expected economic growth to be close to zero in the fourth quarter of this year and in the first quarter of next year. However, it said the weak economy was having only a limited downward impact on inflation, as slow growth was the result of structural factors.