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To halt crisis, Russia central bank hikes interest rates as ruble falls To halt crisis, Russia central bank hikes interest rates as ruble falls
(about 1 hour later)
MOSCOW – In a surprise move intended to prop up Russia’s rapidly plummeting ruble, the Russian Central Bank imposed a massive interest rate hike in the middle of the night Tuesday. MOSCOW — In a surprise move intended to prop up Russia’s rapidly plummeting ruble, the Russian Central Bank imposed a massive interest rate hike in the middle of the night Tuesday.
The move, reminiscent of some of the extreme measures taken during Russia’s 1998 default, was intended to stanch the losses of a currency which as of a day earlier had lost more than half of its value against the dollar this year. But the central bank decision also carried perilous risks for the broader economy, underscoring the limited options available to fight the emerging crisis.The move, reminiscent of some of the extreme measures taken during Russia’s 1998 default, was intended to stanch the losses of a currency which as of a day earlier had lost more than half of its value against the dollar this year. But the central bank decision also carried perilous risks for the broader economy, underscoring the limited options available to fight the emerging crisis.
The move, announced on the central bank Web site at 1 a.m., hiked Russia’s main deposit rate to 17 percent from 10.5 percent, a massive and unusual leap. Now the key test will be how the markets respond. If the ruble does not stabilize, the central bank will have few remaining orthodox tools at its disposal. The move, announced on the central bank Web site at 1 a.m., hiked Russia’s main deposit rate to 17 percent from 10.5 percent, a massive and unusual leap that some analysts described as “shock and awe.” Now the key test will be how the markets respond. If the ruble does not stabilize, the central bank will have few remaining orthodox tools at its disposal.
Russia’s government expects inflation to top 10 percent by the end of this year and for the economy to fall into a recession next year, a perilous combination that can be very difficult to escape. The rate hike — the largest since 1998 — was intended to cap inflation and encourage Russians to keep their savings in rubles instead of switching them to foreign currencies. Russian policymakers have quickly grown nervous about the challenges facing their economy. Earlier this month, President Vladimir Putin vowed “harsh” measures against “speculators” who he said were pushing down the value of the ruble.
Russia’s government expects inflation to top 10 percent by the end of this year and for the economy to fall into a recession next year, a dangerous combination that can be very difficult to escape. The rate hike — the largest since 1998 — was intended to cap inflation and encourage Russians to keep their savings in rubles instead of switching them to foreign currencies.
But it also carried the substantial risk of dealing a broader blow to the economy, already hit by Western sanctions and the crash in the price of oil. The bank said Monday that if oil holds at $60 a barrel next year, Russia’s economy may shrink up to 4.7 percent, the most since 2009.But it also carried the substantial risk of dealing a broader blow to the economy, already hit by Western sanctions and the crash in the price of oil. The bank said Monday that if oil holds at $60 a barrel next year, Russia’s economy may shrink up to 4.7 percent, the most since 2009.
“This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks,” the central bank said in a terse statement on its website announce the rate hike.“This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks,” the central bank said in a terse statement on its website announce the rate hike.
There have been signs of runs on stores in recent weeks, as Russians have been rushing to buy pricey items for fear that their savings will evaporate. Car stores’ sales have risen since November, for example.There have been signs of runs on stores in recent weeks, as Russians have been rushing to buy pricey items for fear that their savings will evaporate. Car stores’ sales have risen since November, for example.
The massive rate hike was the latest sign that Russian policymakers are running out of options in a fast-moving economic crisis. The central bank has tried to slow the ruble’s decline by selling off its foreign-exchange reserves this year, but it has spent more than $80 billion this year to little effect. On Monday alone, the ruble lost more than 10 percent against the dollar, compounding losses that have accelerated since October. The massive rate hike was the latest sign that Russian policymakers are running out of options in a fast-moving economic crisis. The central bank has tried to slow the ruble’s decline by selling off its foreign-exchange reserves this year, but it has spent more than $80 billion this year to little effect.
On Monday alone, the ruble lost more than 10 percent against the dollar, compounding losses that have accelerated since October. As of Monday, one dollar bought more than 64 rubles, compared to 33 at the beginning of the year.
The turmoil has brought to mind Russia’s unsteady 1990s, when the economy was plagued by booms and busts as the nation emerged from Communist rule. The number of Russians worried about the economy has ballooned in recent opinion polls, carrying with it a risk for Putin, who has made stability a key part of his appeal to his constituents. So far, his popularity remains near record highs.
The central bank’s late-night move surprised many analysts, especially since it came only days after the central bank imposed a much more modest rate increase. But after last week’s announcement that rates would rise to 10.5 percent from 9.5 percent, the ruble immediately kept spiking. Some analysts say that tougher controls on prices and on currency transactions may not be far away.
“If today’s measures fail to stem the ruble rout, there is a high probability that policy will veer in a more unorthodox direction,” said Alexander Kliment, an economic analyst at the Eurasia Group, in a research note. “Some top advisers to Putin are openly hostile to rate hikes.”
But others thought that Tuesday’s move may be enough for now.
The “rate hike could prove to be a turning point in the 2014 ruble crisis,” said Neil Shearing, an economist at Capital Economics, a consultancy.
Russia is still sitting on the world’s fourth-largest currency reserves, but the stockpile has shrunk to the lowest since 2009. Analysts warn that much of the $416 billion in reserves is not actually available for fighting a crisis that Russian leaders expect may last for years.
The sharp decline in the ruble in recent months has been closely tied to the dropping price of oil, Russia’s main export. But Western sanctions over Russia’s actions in Ukraine this year have also started to bite the economy. Russia’s main banks now face sharp limits in long-term borrowing from Western markets. And Russian energy companies can no longer buy key Western technology, restricting their ability to develop new oil and gas fields.