Rouble slides after huge rate hike

Published: Tuesday 16th December 2014 by The News Editor

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The rouble staged a two-hour rally today before rolling back to new historic lows a fter a massive overnight rate hike by Russia’s Central Bank, .

The surprise Central Bank decision to raise the rate to 17% from 10.5% came in the early hours in a desperate attempt to prop up the troubled currency.

It is the biggest interest rate hike since 1998, the year when Russia defaulted on its sovereign bonds.

The move was meant to make it expensive for currency traders to buy roubles and sell them on the market.

The rouble regained almost all of its losses from yesterday’s 10% decline, the biggest fall since the 1998 economic meltdown. But it rolled back and was down 3% at 66 to the dollar by noon in Moscow (9am UK time).

Central Bank chairwoman Elvira Nabiullina said in televised comments that the decision should stem inflation and encourage Russians to open rouble-denominated deposits.

Ms Nabiullina conceded that the rouble’s value will not be immediately influenced by the rate hike and said it will take the rouble “some time” before it finds a fair value.

The rouble has lost half of its value this year and the decline intensified in the past months as the economy came under pressure from Western sanctions and plunging oil prices.

Moscow-based investment bank Sberbank-CIB said: “With these steps, the Central Bank is looking to bring stability back to the (foreign exchange) market, which has been behaving irrationally over the last few weeks.

“This state of affairs required extraordinary measures from the Central Bank – and such measures have now been taken.”

The bank added that this step alone is unlikely to reverse the collapse of the rouble, saying that “the longer-term stabilisation will depend on the consistency of the regulator’s (the bank’s) actions and its degree of commitment”.

Russian stocks were declining moderately today with the MICEX benchmark 1.5% lower, reflecting the rate hike’s pressure on businesses.

A decline in the price of oil has weighed heavily on the Russian economy as Russia depends on oil revenue and lacks the diversification to withstand severe economic downturns.

The average price of a barrel of oil has dropped below 56 US dollars from a summer high of 107 dollars. The Russian government recently downgraded its forecast for next year, predicting that the economy will sink into recession.

The central bank has gradually raised the rate from 5.5% early this year. Last Thursday, it tried unsuccessfully to stem the rouble’s slide by boosting its key rate by percentage point to 10.5%.

The rate increase, although it can help stabilise the rouble, could spell serious economic troubles ahead, making it more expensive for companies to borrow funds.

Alexei Kudrin, Russia’s finance minister in 2000/11, said following the rate hike that “the fall of the rouble and the stock market is not just a reaction to low oil prices and the sanctions but also (a show of) distrust to economic policies of the government”.

Mr Kudrin added that the rate hike “should be followed by government measures to raise investor confidence in the Russian economy.”

Published: Tuesday 16th December 2014 by The News Editor

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