Russia’s central bank raised interest rates to the highest in a year, increasing the pace of monetary tightening at an emergency meeting called after one of the steepest depreciations in emerging markets cast a pall the economy.
Policymakers lifted their benchmark to 12 per cent from 8.5 per cent, the second straight increase and the sharpest since the immediate aftermath of Russia’s invasion of Ukraine almost 18 months ago. The meeting was brought forward by a month after the rouble briefly broke through the 100 to the dollar mark for the first time since March last year.
“The decision is aimed at limiting price stability risks,” the central bank said in a statement. Policymakers provided no further guidance and said they next plan to review borrowing costs on September 15th.
The rouble appreciated after the rate announcement before reversing gains and trading weaker against the dollar. It is still among the three worst performers in developing economies this year, with a loss of more than 24 per cent.
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The decision on Tuesday took a page from a playbook that Central Bank of Russia governor Elvira Nabiullina used in the past when the rouble foundered, after an announcement last week the central bank would refrain from foreign currency purchases failed to arrest the rout and a top Kremlin official pinned the blame on the central bank’s “soft” policy.
“Hiking policy rates won’t solve anything,” said Timothy Ash, senior emerging market sovereign strategist at RBC BlueBay Asset Management. “They might temporarily slow the pace of depreciation of the rouble at the price of slower real GDP growth, unless the core problem – the war and sanctions – are resolved.”
The rare public infighting offered a glimpse into the competing priorities driving Russian economic policy. Though a weaker rouble is a boon for government income as revenue from oil exports soared to an eight-month high, it is also driving up the cost of imports and encourages locals to seek safety by shifting money outside the country.
A weaker rouble dramatically accelerated the timeline for monetary tightening, with economists polled by Bloomberg in late July expecting the key rate to rise to no higher than 9 per cent this quarter.
Just three weeks ago, the central bank delivered a hike of a full percentage point after long warning that higher rates were on the way in response to inflationary risks from heavy government spending, sanctions and labour shortages caused by the war. But the stakes rose much higher this month, with the economy drained by capital outflows and annual inflation that exceeded the central bank’s 4 per cent target for the first time since February.
The urgency for Ms Nabiullina became even greater after president Vladimir Putin’s economic adviser Maxim Oreshkin chastised the central bank on Monday, blaming it for allowing faster lending growth to flood the economy with money and calling for a “strong rouble” to help Russia adjust.
Other prominent voices seized on the depreciation as a threat to social stability that made Russia appear vulnerable at a time when the war in Ukraine grinds on and international sanctions hit trade.
Policymakers are counting on the rate hike to boost the appeal of domestic savings and cool off consumer demand that’s contributed to a deterioration in foreign trade and helped bring the current-account surplus to its lowest in two years.
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It’s unclear if the central bank has done enough to iron out the differences that have emerged in the highest echelons of the Russian establishment.
Although Mr Oreshkin said the Bank of Russia “has all the necessary tools to normalise the situation in the near future”, its options are limited beyond keeping rates elevated and tightening capital controls.
With much of the central bank’s reserves already frozen by sanctions, policymakers will be reluctant to wade into the currency market with direct interventions if the rouble comes under pressure again.
“Steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has an impact on the rouble’s exchange rate dynamics through elevated demand for imports,” the central bank said. “Consequently, the pass-through of the rouble’s depreciation to prices is gaining momentum and inflation expectations are on the rise.”
– Bloomberg
