Russia economic - interest rates increased to 10.5%
Published 12 December 2014
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Summary
Russia’s Central Bank raises rates by 100bp to 10.5%. Rates now up 500bp since the start of the year. Rising inflation – which has reached 9.4% – and continued rouble depreciation were the key factors behind the decision. Despite the rise, the rouble falls to a new historic low of 55.2 to the dollar shortly after the announcement.
Detail
At its monthly Board meeting on 11 December, the Central Bank of Russia (CBR) raised its key interest rate by a further 100bp from 9.5% to 10.5%. This was the fifth rise since March, and means that the key rate has now increased by 500bp since the start of the year.
In its accompanying explanatory note, the CBR stated that rising inflation and continued rouble depreciation were the key factors behind its decision. It reported that annual inflation reached 9.4% on 8 December, and predicted it would reach 10% by the end of the year – far above the 4% medium-term target. Notably, it also estimated that the cumulative contribution of rouble depreciation and Russia’s food import ban would account for 4.9 percentage points of inflation by the year-end. It struck a hawkish note on the possibility of future hikes, stating that “in case of further aggravation of inflation risks, the Bank of Russia will continue to raise the key rate”.
The CBR also painted a gloomy picture of Russia’s economic prospects over the next couple of years. After predicted GDP growth of 0.6% this year, it expected that growth would be close to zero in both 2015 and 2016. Forecasting “persistently restricted access to the international capital markets for Russian companies and relatively cheap energy resources”, it predicted that levels of fixed capital investment would continue to fall. Consumption would remain weak. However, it expected that economic activity would start to recover in 2017, as import substituting industries began to develop and non-commodity exports increased.
Market response
The 100bp rise was in line with market consensus ahead of the meeting. Capital Economics described the hike as “the minimum the central bank had to deliver given the recent slide in the rouble” and suggested it was “fully priced into the market”. Given that inflation is likely to rise further, and with continuing pressure on the rouble, most analysts expect to see further rate rises in the first quarter of 2015.
The hike failed to support the rouble, which fell to a new historic low of 55.2 to the dollar shortly after the announcement.
Comment
Although the CBR has resumed limited interventions in the FX markets in December (it spent $4.5 billion of reserves doing this last week, and has made further interventions this week), the move to a floating rouble regime in November means that interest rates are now its key tool for stabilising the currency. However, the fact that the rouble fell to a new low after this 100bp hike shows that the Central Bank’s ability to influence the FX markets is currently very limited.
At a press conference yesterday, PM Medvedev warned the public that, because the rouble was now undervalued, they would ultimately lose out if they converted their savings into foreign currency. But the further the rouble falls, the greater the risk that a more significant currency crisis could develop.
Disclaimer
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