Russia's central bank makes shock 650bp rate hike to stem ruble collapse

By bne IntelliNews December 16, 2014

bne IntelliNews -


The Central Bank of Russia hiked its main interest rate from 10.5% to 17% in the wee hours of December 16. "This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks," the central bank said in a statement.

The ruble fell to 64 to the dollar on December 15 from 58 at opening. The 10% fall is the biggest since 1999. The ruble has now dropped by 50% to the dollar in the course of the year, overtaking Ukraine's hryvnia as the world's worst performing currency.

The ruble collapsed on December 15 despite the price of oil remaining flat at $62 per barrel, and raised the threat of a full-blown financial crisis in Russia if the population were to withdraw bank deposits to convert them to dollar cash, triggering a bank run.

The central bank has previously been accused of doing to little to help the ruble despite having huge currency reserves. "It makes you think whether they forgot to read the manual which came with the bazooka," Tim Ash of Standard Bank said in an emailed note. He followed up the hike by saying: "This was a move reflecting just how far the CBR had got behind the curve. In a situation where a central bank allows its currency to depreciate by 10 per cent in a day, the message is that they have lost control, and their very credibility is at stake."

Analysts surveyed expected the move could temporarily halt the ruble's fall, pointing out that Turkey had succeeded in reversing a currency rout in January 2014 with a 4.25% interest rate hike. 

But in an updated economic forecast released on December 15, the central bank warned that GDP would contract by 4.5% to 4.7% in 2015 if the price of oil were to remain at its current level of $60 per barrel. The central bank is forecasting the price of oil at $80 per barrel in 2015. The central bank is also anticipating that the EU and US sanctions restricting Russian access to foreign capital markets will last "for the forthcoming three years."

The ruble collapse spilled over on to Russia's stock markets, with the index of Russia's dollar- denominated RTS exchange collapsing by 8.5% to its lowest point since July 2009. The ruble- denominated MICEX fell by 2.5%.

Five-year Russian credit default swaps spiked by nearly 50 basis points to 537bp. Dollar-denominated sovereign debt yield jumped by over 0.5pp to 7.22%.

The central bank announced it would increase hard currency repo auctions from $1.5bn to $5bn to channel dollar liquidity to banks, as Russian corporates look to pay down billions of dollars in foreign debt before the end of the year, which Western sanctions have prevented them from rolling over. 

"For now, it remains uncertain whether the hike would be enough to lead to exchange rate stability, or if after brief optimism, we see further deterioration as fundamental factors prevail," wrote analysts at Japanese financial group Nomura.

UBS analysts, however, were more positive on the central bank's rate hike, calling it "a credible move" that reinforces market-based policy responses. "It’s an ugly situation in Russia, but the CBR, not for the first time, has impressed the market with its boldness," they say, arguing that the interest rate hike "may mark an important point of de-escalation in the nascent ruble crisis."

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