Russia’s Emergency Rate Hike Fails to Lift Ruble After Crash

Russia’s central bank raised interest rates sharply and said another increase is possible, but fell short of reversing declines in the ruble amid one of the steepest depreciations in emerging markets.

(Bloomberg) — Russia’s central bank raised interest rates sharply and said another increase is possible, but fell short of reversing declines in the ruble amid one of the steepest depreciations in emerging markets.

Policymakers lifted their benchmark to 12% from 8.5%, the second straight increase and the sharpest since the immediate aftermath of Russia’s invasion of Ukraine almost 18 months ago. The emergency meeting was called after the ruble briefly broke through 100 to the dollar for the first time since March last year.

The ruble appreciated after the rate announcement before reversing gains. It traded down 1.1% at 98.79 to the dollar as of 2:40 p.m. in Moscow. The currency is still among the three worst performers in developing economies this year with a loss of about 25%.

The precipitous decline in the Russian currency has thrust the central bank onto center stage in an increasingly fraught debate over how to steer an economy battered by shrinking export revenues and isolated from international financial markets. And even with rates now at their highest in over a year, the market remains unimpressed as capital seeps out.

“The recent acceleration of ruble weakness might indicate that some cracks in the capital control might have emerged and therefore capital might be able to flee Russia at an increasing speed,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG. “The rate hike will hardly convince those who might have a choice to keep their capital inside Russia.”

The central bank said in a statement that its move was “aimed at limiting price stability risks,” without providing any clear guidance on what it plans to do next. More than two hours later, it sent a follow-up comment to say another rate increase is on the table if pro-inflationary risks strengthen. 

Grievances Aired

The decision on Tuesday took a page from a playbook that Governor Elvira Nabiullina used in the past when the ruble foundered, after an announcement the central bank would refrain from foreign-currency purchases last week failed to arrest the rout and a top Kremlin official pinned the blame on the central bank’s “soft” policy.

The rare public infighting offered a glimpse into the competing priorities driving Russian economic policy. Though a weaker ruble is a boon for government income as revenue from oil exports soared to an eight-month high, it’s also driving up the cost of imports and encourages locals to seek safety by shifting money outside the country.

A weaker ruble 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% this quarter. 

Just over 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 labor 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% target for the first time since February. 

What Bloomberg Economics Says…

“The central bank’s strategic surprise is an attempt to boost savings in local currency and increase the credibility of its 4% inflation target. We think the Bank of Russia will now likely keep its policy rate on hold for the rest of 2023.”

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

The urgency for Nabiullina became even greater after President Vladimir Putin’s adviser chastised the central bank on Monday, blaming it for allowing faster lending growth to flood the economy with money and calling for a “strong ruble” 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.

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 Kremlin economic aide Maxim Oreshkin said the Bank of Russia “has all the necessary tools to normalize 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 ruble comes under pressure again. 

“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 ruble at the price of slower real GDP growth — unless the core problem, the war and sanctions, are resolved.”

(Updates with additional central bank comments starting in first paragraph.)

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