17%! Russia launches a massive interest-rate hike at 1am Moscow time

The Bank of Russia has raised its key interest rate to 17 percent from 10.5 percent in a desperate move to boost its currency and rescue its troubled economy.

The action announced Tuesday in Moscow comes after the ruble’s value has sunk roughly 50 percent since January, battered by Western sanctions imposed over the conflict in Ukraine and plunging worldwide oil prices. The falling ruble threatens to escalate Russia’s inflation to dangerous levels and paralyze the economy.

The FX news was the featured headline on American popular news aggregator Drudge Report

The FX news was the featured headline on American popular news aggregator Drudge Report

The central bank’s aggressive move illustrated the magnitude of the perils confronting Russia. It reflected fears that the ruble’s decline could trigger consumer panic, incite a run on banks and deepen Russia’s economic problems.

By raising interest rates, the bank hopes investors will find it more financially appealing to keep their money in Russia.

“They did it as a lure to encourage people to keep their rubles at home rather than continue to flee the currency and the country,” said Barry Eichengreen, an economist at the University of California, Berkeley. “It’s a way of buying time. It doesn’t solve any of the underlying issues that the Russian economy has” — falling energy prices, Western sanctions and widespread corruption.

Such challenges are especially difficult because Russia’s economy relies so heavily on petroleum revenue and lacks the diversification to withstand severe economic downturns.

That tends to leave the economy at the mercy of global financial markets, where oil is priced in dollars. The average price of a barrel of oil has dropped below $56 from a summer high of $107. The Russian government recently downgraded its growth forecast for next year, predicting that the economy will sink into recession.

Still, the Bank of Russia’s latest action carries dangers of its own. By jacking up rates to try to contain inflation, it risks inflicting further economic damage, Eichengreen noted. Though high interest rates can attract investor money, they can also stifle growth by making it harder for consumers and businesses to borrow and spend.

The announcement in Moscow came after U.S. and European markets had closed Monday. Stocks have suffered in recent days amid the steady drop in global oil prices. The sell-off could continue if investors view the Bank of Russia’s move as ineffective.

The central bank has gradually raised the rate from 5.5 percent early this year. Last Thursday, it tried unsuccessfully to stem the ruble’s slide by boosting its key rate by 1 percentage point to 10.5 percent. It cited a surge in consumer prices and a “significant inflation risk.”

The Bank of Russia said then that it expected prices to rise 10 percent for 2014 and climb further in the first quarter of 2015.

But the ruble plunged further Monday, dropping from 55 rubles to the dollar Thursday to about 65 rubles to the dollar.

A falling currency increases the cost of imports, thereby stoking inflationary pressures. At the same time, plummeting oil prices give the government less money to combat a downturn and can force it to borrow more.

The sanctions imposed by the West have magnified Russia’s economic turmoil.

In September, the United States and the European Union announced a new round of sanctions over Moscow’s involvement in Ukraine, which included blocking Western financial markets to key Russian companies and limiting imports of some technologies.

The additional sanctions were expected to cause enough pain to put Russia into recession for one or two years, predicted economist Alexei Kudrin, who served as finance minister under President Vladimir Putin for 11 years until 2011.

The potential for a prolonged downturn caused investors to pull their money from the country, causing the ruble to further lose value.

Source: AP

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