Russia’s central bank has taken decisive action in response to the recent decline of the ruble
hiking its key interest rate by 350 basis points to reach 12%. This emergency move was prompted by a public call from the Kremlin for tighter monetary policy. The rapid decline of the ruble was exacerbated by Western sanctions impacting Russia’s trade balance and increased military spending.
The ruble Falls
The ruble, which had fallen below the 100 threshold against the dollar on Monday
exhibited a modest recovery after the central bank’s decision. Despite this recovery, the currency remained weaker by 0.3% at 98.00 by 0837 GMT
though it significantly above the lows of around 102 observed on Monday
The decision to convene an extraordinary rate meeting came shortly after President Vladimir Putin’s economic adviser
Maxim Oreshkin, criticized the central bank’s soft monetary policy for the ruble’s weakening. This rebuke followed by the bank’s announcement of the emergency meeting, a move that aimed to stabilize the currency.
The central bank’s statement on Tuesday highlighted growing inflationary pressures and the need to curb risks to price stability. The pass-through effect of the ruble’s depreciation on prices and rising inflation expectations were key concerns.
Central Bank Governor
Central Bank Governor Elvira Nabiullina, who has received praise for her handling of the economy during Russia’s military operations in Ukraine, now faces challenges due to the plummeting ruble and high inflation. Public criticism of her monetary policy, especially from pro-war nationalists
adds to the pressure as Russia approaches its presidential election in March 2024.
The rouble’s depreciation not only has the potential to boost inflation but also communicates the costs of the Ukrainian invasion to the Russian public. As such, the central bank’s decision likely has both political and economic motivations.
Russia witnessed double-digit inflation in 2022, and although there was a deceleration in the spring of 2023 due to the high base effect, annual inflation has surpassed the central bank’s 4% target once again.
Russia’s deployment of troops to Ukraine
The central bank’s move marks its first emergency rate hike since February 2022
when rates were raised to 20% following Russia’s deployment of troops to Ukraine. Since then, the bank had gradually reduced the cost of borrowing to 7.5% as inflation pressures eased. However, inflation has accelerated once more, with annualized price growth averaging 7.6% over the past three months on a seasonally adjusted basis.
Analysts have speculated that the central bank’s decision to remove the signal for further rate hikes might indicate that rates have peaked at 12%. It expected that the key rate will remain at this level for the rest of the year.
Russia’s budget deficit and labor shortage have contributed to inflationary pressures. The rapid devaluation of the ruble, from around 70 against the dollar at the start of the year to over 100 on Monday, necessitated the central bank’s intervention. Previous measures to curb ruble depreciation considered insufficient, and the recent rate hike expected to offer only temporary relief
given Russia’s challenges in attracting capital inflows due to sanctions and limited intervention options.
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