Ruble plunges after surprise interest rate cut

By bne IntelliNews January 30, 2015

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The ruble has crashed to below RUB71 against the dollar following a surprise interest rate cut by Russia's central bank on January 30. The central bank announced a 2% cut in the key policy rate, from 17% to 15%, “taking into account the changing balance of risks between consumer price inflation and economic slowdown". It believes that the forecast economic contraction of 3.2% in the first half of 2015 on the year should contain inflation.

Markets reacted immediately, with the ruble plummeting in value against the dollar, to cross the RUB71 to the dollar mark, its weakest value for six weeks.  “The central bank is comfortable still with the rouble continuing to take the strain” from low oil prices, Western sanctions, weak growth, and lack of reforms," says Tim Ash of Standard Bank.                               

On December 15 the central bank introduced the 17% rate – hiked up from a previous rate of 10.5% - as an emergency measure to stem a collapse in the value of the ruble, but at the cost of potentially throttling Russia's economic prospects. With the ruble having apparently stabilised around 65 rubles to the dollar - as the oil price stabilised at around $50 to the barrel - the central bank took the opportunity to start dropping interest rates.

The market however expected the 17% rate to be retained, and the surprise jolted the market. Russia's central bank has come under fire for its unpredictable handling of the ruble crisis, and this led to personnel changes in the first half of January, apparently aiming to separate macroeconomic forecasting functions from policy decisions.

The next decision on interests rates is scheduled for March 30.

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