RUSL - Russia central bank sharply hikes rates in emergency meet to stem ruble crash

2023-08-15 05:55:35 ET

Russia's central bank sharply raised its key interest rate by a whopping 350 basis points to 12% from 8.5% at an emergency meeting on Tuesday, as the Kremlin moves to stem the rapid weakening of the ruble.

The Bank of Russia said the decision was aimed at limiting price stability risks. "Steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has impact on the ruble's exchange rate dynamics through elevated demand for imports."

The central bank warned that the risk of inflation moving upward from its 2024 target of 4% is "substantial", with inflation rising to 4.4% as of August 7.

The rate hike was the second one in a row and the sharpest since Russia's invasion of Ukraine nearly 18 months ago.

The ruble ( USD:RUB ) strengthened immediately after the central bank's move, rising to around 95 against the dollar. It has since pared gains to trade just under 98.

The ruble had fallen past 100 against the dollar a day earlier. The currency has lost about a quarter of its value since Russia invaded Ukraine, given the country's widening budget deficit amid Western sanctions and soaring military spending.

"This is really about symbolism," tweeted Russian economist Konstantin Sonin. "Such a hike cannot stop the general trend of the weakening ruble."

Sonin pointed out that the main pressure on ruble comes from the ever-increasing war spending, which won't be affected by market rates.

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