Russian central bank hikes interest rates by 100bp to stop ruble's fall

By bne IntelliNews December 11, 2014

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Russia's central bank has increased the key interest rate by 100bp to 10.5%, the fourth hike of the interest rate this year from an initial rate of 5.5%. The increase was largely expected, with the analyst consensus surveys indicating  a rate hike of 100bp-150bp.

The CBR attributed the increase to acceleration of inflation and currency devaluation expectations, contributing to significant inflationary risks. The central bank, which expects headline inflation to reach 10% in the first quarter of 2015, maintained that interest rate increases could help bring inflation down to 4% in the mid-term perspective. Previous toughening of the monetary policy did not influence inflationary dynamics, the CBR said, and pledged to increase the rate further should the inflationary risks persist. At the same time, the central bank's comment acknowledges waning credit growth, against a background of increased interest rates, and forsees the economy expanding by 0.6% in 2014.

Analysts surveyed by Prime do not believe that the interest rate hike is going to influence the situation on the currency market. Some of the traders and analysts expected a bold 4pp-5pp interest rate hike targeting the worst ruble devaluation since 1998. But a gradual rate increase is likely to be ignored by the market, the same as in November, and is not going to shake off strong ruble dependency on oil prices.

On the contrary, higher interest rates will further feed the pessimistic growth outlook on economic growth, Sberbank CIB's Tom Levinson argues. Market participants have also grown more accustomed to the new CBR's moderate currency intervention policy, Sberbank CIB analysts believe. Piotr Matys from Rabobank International in London told Bloomberg that for CBR “preventing a full-scale financial crisis is far more important than avoiding recession".

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