Russian central bank hikes interest rates by 150bp to stop ruble's fall

By bne IntelliNews October 31, 2014

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Russia's central bank will hike the main interest rate from 8% to 9.5%, the bank said in a press release, seen by the market as an aggressive measure to stem the fall of the ruble.

Most analysts had been expecting a 50-basis-point hike, so the 150-basis-point hike came as a surprise move that strengthened the ruble while sparking fears it could tip the economy into recession.

In a press release, the central bank argued the move was motivated by its battle with inflation, which it forecast will remain above 8% till the end of 2014 and in first quarter of 2015, because of Russian sanctions on imports of Western foodstuffs, alongside the knock on effect of the ongoing devaluation of the ruble. The two factors combined would push consumer prices up by around 2.5 basis points, the central bank said.

The central bank also said that the economy grew by only 0.2% on the year in third quarter, but that slowing growth rates would not translate into decreasing inflation, since labour force and industrial capacities were already fully employed, leaving no slack. 

The central bank made no mention of an early switch to a ruble free float, currently scheduled for January 2015, as some market participants had anticipated.

"No radical move in terms of a speedier move to inflation targeting/float as some had suggested, hence disappointment there," writes Standard Bank's Tim Ash. "The combination of inflation moving towards double digits and with the basket level for the ruble approaching the 50 mark, the CBR [central bank of Russia] decided that it had to do something more substantive on the rate front”.

The ruble was seen to continue a rally that took it to RUB42 to the dollar on October 30, in anticipation of the rate hike. After weakening to RUB42.4 immediately before its announcement, it strengthened again to hit  RUB42.2 to the dollar, but then began to fall back.

“This rate hike is large, but the rouble rallied initially, and is now selling off, so they CBR better be prepared to back this up with further action if this does not work,” wrote Ash. “Seems like the CBR has been getting worried as the Ruble basket approaches the 50 mark.”

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