Russia succumbs to emerging-market turmoil and raises rates
Moscow — On Friday, Russia’s central bank raised its interest rates for the first time since a currency crisis in 2014 as worries about emerging-market turmoil and Western sanctions batter the rouble.
The Bank of Russia (BOR) said in a statement that it is lifting its benchmark lending rate by 0.25 percentage points to 7.5% and could raise it again in the future to rein in any acceleration in inflation.
"Changes in external conditions" since the bank’s last policy meeting in July "have significantly increased pro-inflationary risks", the statement said. The bank cited growing uncertainty over Western sanctions as well as capital outflow from emerging markets.
The move came as a surprise: analysts have been penciling in no change in borrowing rates at this meeting as rates have remained unchanged since March 2017. Upgrading the bank’s inflation forecast for next year to 5.0% to 5.5% from 4.0%, BOR chief Elvira Nabiullina told journalists that the weakening of the rouble in August "could fuel a further rise in inflation expectations".
"The BOR will consider the necessity of further increases in the key rate, taking into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets," the statement said. The central bank also announced it will halt its purchases of foreign currency — aimed at balancing effects of the oil price and stabilising the rouble — until the end of the year.
The bank said this is intended "to curtail exchange-rate volatility and its influence on inflation over the next few quarters". Since the latest round of US sanctions and under the threat of further measures, the rouble has dropped sharply in value against the dollar and euro.
The central bank’s latest rate raise immediately pushed up the value of the rouble against the dollar and euro after it fell further at the beginning of this week. In the minutes after the announcement, the dollar and euro fell against the rouble. At about 3pm GMT, the euro was exchanged for 79.36 roubles on the Moscow stock exchange and the dollar for 68.05.
On Monday, the dollar broke the symbolic barrier of 70 roubles and the euro rose to more than 81.75, levels not seen since March 2016.
The fall in the rouble’s value since August "has made the BOR much more concerned about inflation next year", said London-based analysts Capital Economics. The central bank is also acting "to stem capital outflows resulting from fears about new US sanctions".
The BOR last increased its benchmark lending rate to 17% in December 2014 in an emergency move aimed at stemming a dramatic decline in the rouble amid falling oil prices and Western sanctions at the time. The announcement of the new rate hike immediately bolstered the value of the rouble against the dollar and euro. The central bank is scheduled to hold its next monetary policy meeting on October 26.