Russia Raises Rates With Ruble Weaker Despite Emergency Hike

Russia’s central bank raised interest rates for a third straight time, bracing for inflationary risks and adding to an emergency hike a month ago that’s so far done little to take pressure off the ruble.

(Bloomberg) — Russia’s central bank raised interest rates for a third straight time, bracing for inflationary risks and adding to an emergency hike a month ago that’s so far done little to take pressure off the ruble.

Policymakers lifted the benchmark to 13% from 12% on Friday. In a statement accompanying the decision, the central bank said it “will consider the necessity of further key rate increases at its upcoming meetings.” 

A set of forecasts issued alongside the announcement showed policymakers now expect a higher rate trajectory in 2023-2024 and see inflation at 6%-7% this year, compared with 5%-6.5% previously.

“We raised the key rate because inflation risks have materialized and plan to keep it at high levels for quite a long time until we are convinced of the sustainable nature of the inflation slowdown,” Governor Elvira Nabiullina told reporters in Moscow after the rate meeting.

The Bank of Russia is braving risks to the economy after the odds of recession rose sharply following its 3.5 percentage-point move in August. Tighter policy remains warranted as the ruble is under strain and the inflation outlook is deteriorating.

The reluctance by officials to stiffen restrictions on the movement of capital is leaving the central bank with few options apart from higher rates. Price growth is breaching its 4% target while the wartime economy is running at full steam despite sanctions imposed in punishment for the invasion of Ukraine.

Although the steep rate hike briefly halted declines in the ruble, it’s remained weak and volatile, a further threat to inflation by making imports more expensive. The Russian currency has lost about 23% of its value against the dollar this year, the worst depreciation in emerging markets after the Turkish lira and Argentina’s peso.

What Bloomberg Economics Says…

“The Bank of Russia’s hike to 13% is an attempt to protect its credibility. Recent government forecasts show that inflation will continue to exceed the central bank’s 4% target for a fifth consecutive year in 2024 — signaling growing risks of inflation expectations de-anchoring.”

—Alexander Isakov, Russia economist. For more, click here

While the currency hasn’t reached the symbolic mark of 100 per dollar it broke last month, it’s still down over 2% since late August. The ruble is benefiting slightly from a temporary acceleration of foreign-exchange sales by the central bank in mid-September, which it said were needed because a government Eurobond is coming due this week.

The ruble pared gains after the rate announcement on Friday but still traded 0.5% stronger against the dollar at 96.8675 as of 3:29 p.m. in Moscow. It earlier strengthened as much as 1.3%.

The central bank’s message contained a “very tough signal,” according to Sofya Donets, an economist at Renaissance Capital. 

“In our opinion, the current level of rates is significantly higher than what could be justified only by inflation risks and largely remains a reaction to exchange-rate dynamics — or rather, market sentiment and expectations associated with it,” she said.

President Vladimir Putin this week called the emergency rate decision timely and appropriate, sounding reassured about the ruble by describing the currency’s swings as “manageable” and not in need of more extreme measures.

Another rate hike will be costly for an economy still adapting to sanctions and powered to a large extent by budget spending and a boost in military production.

The hike in August already more than tripled the odds of recession in the next six months to around 20%, according to Bloomberg Economics, which estimates they could approach 40% if rates rise further.

“The imbalance in the foreign exchange market is difficult to solve with interest rates,” said Rosbank economist Evgeny Koshelev in Moscow. “As long as we are waiting for this summer’s influx of hard currency from export operations — and we can wait a long time — we will see both exchange-rate volatility and problems with ‘inflationary risks.’”

(Updates with analyst comments starting in 10th paragraph.)

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