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Russia Raises Key Lending Rate Russia’ Raises Key Interest Rate
(about 5 hours later)
MOSCOW — Russia’s central bank raised its main lending rate to 10.5 percent from 9.5 percent on Thursday, in line with analysts’ expectations, citing an increase in inflation and rising expectations that the ruble would weaken. MOSCOW — Russia’s central bank raised its key interest rate Thursday in an effortt to curb inflation and slow the plunge of the ruble.
The bank also predicted lower economic growth over the next three years than previously forecast and, using significantly more hawkish language, said it would continue to raise its key rate if inflation risks strengthened. The rate increase is the latest sign of the problems in the troubled Russian economy, which is expected to fall into recession next year. Falling prices for oil, Russia’s main export commodity, and Western sanctions over the Ukraine crisis have have battered the currency and economy.
The bank has been under pressure to tighten policy to support the ruble, which has fallen almost 40 percent against the dollar since June, and to rein in inflation, which reached 9.1 percent in November. Some economists say Russia is now trapped in the insidious economic quicksand of stagflation, or high inflation and low growth, with few good policy options. The bank said it would continue raising rates, if inflation and by extension the ruble decline did not come under control.
The ruble extended its losses after the central bank’s decision. Many investors had expected tougher action to support the currency. But the central bank is fighting an uphill battle, as the economy continues to deteriorate.
The central bank has spent more than $75 billion defending the ruble this year, including more than $5 billion since it floated the currency a month ago. The increase in the bank’s base rate on Thursday to 10.5 percent from 9.5 percent should have encouraged Russian individuals, companies and banks to hold savings in rubles, rather than shift them into dollars. Instead, the ruble continued its plunge on Thursday.
The central bank has also tried to defend up the currency, by spending $75 billion since the beginning of the year in an effort to prop up the ruble. But it’s been a fruitless task.
The currency has weakened preciptiously since the start of the year, falling more than 40 percent to around 55 rubles to the American dollar. The bulk of the drop has taken place since September.
Officially, the Russian central bank has decided to let the ruble float freely, so that a decline against the dollar might actually help domestic manufacturers and farmers, while rising prices of imports in ruble terms crimp demand for them, helping the trade balance. The bank has largely switched from setting a target for exchange rates, to setting a target for inflation.
But it’s a difficult balancing act. And because a large portion of consumer goods, including food, is imported, the bank cannot cap inflation without controlling the ruble slide.
The bank had been striving to keep rates low, to bolster business activity and growth, rather than steepen the economic slowdown with higher rates, but pivoted to raising rates last spring after the Ukraine crisis put more pressure on the ruble.
The pressure has only mounted. A week ago, the Russian government conceded for the first time that the economy was facing a recession. The government said the economy will contract by 0.8 percent in 2015, while inflation is now running at 9 percent.