Russian Rouble Slides Despite Shock Rate Hike

An aggressive attempt by Russia’s central bank to halt a dramatic slide in the value of the rouble appears to have failed.

The currency strengthened – by more than 9% against the dollar at one stage – in the wake of the surprise intervention which saw the core interest rate raised from 10.5% to 17%.

But those gains were later erased as the rouble lost a further 3%.

The Bank of Russia’s action, announced overnight, was a response to the rouble’s value sinking by almost 50% over the course of the year – hit by Western sanctions imposed over the conflict in Ukraine and plunging worldwide oil prices.

It was also intended to settle nerves back home as fears grow that the extent of Russia’s economic problems – largely unreported by state media – could at some stage potentially spark panic among consumers as price rises become unmanageable.

By raising interest rates, the bank hoped too that investors would find it more financially appealing to keep their money in Russia.

Russia’s economy relies heavily on revenue from oil, which is priced in dollars.

Falls of more than 50% in world oil prices are tipped to plunge the country into recession next year and the value of Brent crude slipped to new five-year lows on Tuesday, falling below $60-per-barrel for the first time since July 2009.

The central bank had raised the rate from 5.5% earlier this year to 10.5% just last Thursday.

The Bank of Russia said then that it expected inflation to run at 10% this year but climb further in the first quarter of 2015.

But the ruble plunged further against the dollar on Monday, dropping from 55 rubles last week to about 65 rubles to the dollar.

A falling currency increases the cost of imports, thereby stoking inflationary pressures.

At the same time, plummeting oil prices give the government less money to combat a downturn and can force it to borrow more.

The sanctions imposed by the West have magnified Russia’s economic turmoil.

In September, the US and the European Union announced a new round of sanctions over Moscow’s involvement in Ukraine, which included blocking Western financial markets to key Russian companies and limiting imports of some technologies.

The potential for a prolonged downturn caused investors to pull their money from the country, causing the ruble to further lose value.

More follows…

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16 December 2014 | 9:26 am – Source: orange.co.uk

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