Title: Russia Raises Interest Rates to Tackle Inflation and Strengthen the Ruble
Subtitle: Central bank takes emergency measures as the ruble faces significant decline
Date: [Insert Date]
TALLINN, Estonia (AP) — Russia’s central bank has made a substantial interest rate hike to combat inflation and stabilize the ruble. This emergency move comes as the country’s currency reaches its lowest value since early in the war with Ukraine.
In recent months, the ruble has lost more than a third of its value due to increased military spending by Moscow and the impact of Western sanctions on its income from energy shipments. However, analysts who study Russia believe that the flagging currency does not indicate an economic freefall, although there are challenges such as rising prices for households and businesses.
One benefit of a lower exchange rate is that it allows Moscow to convert the dollars earned from oil and gas sales into more rubles for essential payments, including pensions and government agencies. Despite this, experts suggest that the significant drop in the ruble’s value necessitates tightening measures to prevent further decline.
CEO of Macro-Advisory Partners, Chris Weafer, states that while sanctions will erode Russia’s long-term economic growth, the depreciated ruble does not indicate an imminent economic crisis. The central bank’s decision to raise its key rate by 3.5 percentage points to 12% yielded a temporary strengthening of the ruble, which has since stabilized at around 98 rubles to the dollar.
The central bank attributes the need for the rate hike to the country’s excessive demand for goods, which has outpaced output expansion, leading to inflation and affecting the ruble’s exchange rate dynamics through increased import demand.
The intentional devaluation of the ruble by the government and central bank was previously deemed essential to increase rubles for each dollar of oil revenue, supporting military and social program spending. However, experts argue that this devaluation has been carried out excessively, prompting the central bank to step in and reassess the situation.
Sergei Guriev, provost and professor of economics at the Sciences Po institute, suggests that Russia’s economy, while facing challenges such as decreased oil and gas revenue, capital outflow, and a budget deficit, does not indicate a major disaster. Guriev highlights that maintaining the ruble below 100 to the dollar was crucial for political reasons, prompting the central bank’s intervention when the threshold was breached.
Despite benefiting the government, a weaker ruble also leads to higher costs for households and certain parts of the Russian war machine, as it increases the need for foreign currency to circumvent sanctions or purchase weapon components from other countries.
The rate hike follows President Vladimir Putin’s economic adviser, Maksim Oreshkin, blaming the weak ruble on loose monetary policy. Oreshkin asserts that the central bank has all the necessary tools to stabilize the situation, and normalization is expected shortly.
By increasing borrowing costs, the central bank aims to combat price spikes resulting from increased imports and decreased exports, particularly in the oil and gas sector, as defense spending rises and sanctions take their toll. The smaller trade surplus associated with importing more and exporting less typically weighs on a country’s currency.
Inflation has reached 7.6% over the past three months, prompting last month’s 1 percentage point rate hike. The central bank projects that inflation will continue to rise, with the fall in the ruble contributing to the risk. The bank’s next meeting is scheduled for September 15.
After the imposition of Western sanctions following the invasion of Ukraine in February 2022, the ruble had plummeted to as low as 130 to the dollar. However, the central bank’s prompt intervention, which saw interest rates increase to as high as 20% and the implementation of capital controls, stabilized the currency’s value. Subsequently, the bank began gradually reducing rates.
In conclusion, Russia’s central bank’s interest rate hike aims to address inflation concerns, strengthen the ailing ruble, and ensure economic stability amidst rising global tensions and challenges.