Skip to main content

A navy sailor looks on near a board showing currency exchange rates in St. Petersburg, Oct. 30, 2014.ALEXANDER DEMIANCHUK/Reuters

Russia's central bank increased its benchmark interest rate more than forecast by economists, bringing it to the highest level since it was introduced 13 months ago to halt a currency run that's stoking inflation.

The Bank of Russia raised its key rate to 9.5 per cent per cent from 8 per cent, according to a website statement. The move surprised all 31 economists surveyed by Bloomberg. Twenty– two predicted a move to 8.5 per cent and two forecast a shift to 9 per cent, with increases of a quarter-point and 75 basis points forecast by one each. Five economists saw no change.

Governor Elvira Nabiullina has moved to tighten policy since the crisis in Ukraine flared in March, increasing borrowing costs to cool inflation expectations and halt the largest capital outflows since the collapse of Lehman Brothers Holdings Inc. in 2008. The ruble gained the most among developing-nation currencies yesterday, rebounding from a record as speculation mounted that the central bank will raise rates.

"Significant changes in external conditions have taken place: a considerable fall in oil prices and stricter sanctions imposed by certain countries," the central bank said in the statement. "As a result the ruble depreciated – that together with restrictions on the import of certain food items imposed in August resulted in further acceleration in consumer-price growth."

The ruble extended losses after the announcement and was trading 1 per cent weaker at 42.0730 per dollar as of 1:37 p.m. in Moscow.

Economy, Inflation The central bank juggled faster inflation and sluggish economic growth before the ruble moved to the forefront of policy concerns. The regulator, which plans to move to a free float regime from 2015, intervened on the currency market in October for the first time since May, selling almost $27-billion, central bank data show.

The currency defence has sapped international reserves, bringing the stockpile to $439.1-billion, near the lowest level in four years. Capital outflows reached $85.2-billion in the first nine months of the year, the highest since 2008, when the exodus reached $133.6-billion.

Russia won't "mindlessly burn up" reserves to defend its currency, President Vladimir Putin said Oct. 24. The U.S., Ukraine and the European Union accuse Russia of sending cash, arms and fighters to aid separatist rebels in Ukraine.

Food Ban A weaker ruble boosts prices of imports, feeding the inflation rate that was already on the rise after Putin retaliated in August against U.S. and European sanctions over Ukraine by restricting a range of food imports. The currency's devaluation is adding as much as 2 percentage points to inflation, Deputy Economy Minister Alexei Vedev said Oct. 27.

That won't sit well with a majority of Russians, for whom inflation is the top concern, according to a July poll published by the state-run VTsIOM research center. Price growth accelerated to 8 per cent from a year earlier in September, the fastest in three years and double the regulator's medium-term target.

"The continued slide in the ruble over the past few weeks has raised the prospect that Russia is in the grip of a self– fulfilling currency crisis," Neil Shearing, chief emerging markets economist at Capital Economics in London, said before the announcement. "The central bank needs to regain the initiative. A first step would be to raise interest rates by more than the market expects at this week's board meeting."