Russia Interest rate increase

Russia surprises with massive interest rate hike hit of 3.5%

Interest rate pushed to 12%

Russia’s central bank has announced a surprise hike in its key lending rate by 3.5%, from 8.5% to 12%, as the country’s economic recovery loses steam amid a resurgence of COVID-19 cases and weak domestic demand.

The decision was announced after an emergency meeting of the bank’s board of directors was called a day earlier as the ruble declined. The fall comes as Moscow increases military spending and Western sanctions weigh on its energy exports.

The Russian currency passed 101 roubles to the dollar on Monday, losing more than a third of its value since the beginning of the year and hitting the lowest level in almost 17 months. It had recovered slightly after the central bank announced the meeting.

The central bank blamed the weak ruble on ‘loose monetary policy‘, suggesting that bank has ‘all the tools necessary‘ to stabilize the situation.

More imports, less exports

By raising borrowing costs, the central bank is trying to fight price spikes as Russia imports more and exports less, especially oil and natural gas, with defense spending going up and sanctions taking a toll. Importing more and exporting less means a smaller trade surplus, which typically weighs on a country’s currency.

The bank also made a big rate hike of 1% last month, saying inflation is expected to keep rising and the fall in the ruble is adding to the risk.

After Western countries imposed sanctions on Russia over the invasion of Ukraine in February 2022, the ruble plunged to a low of 130 to the dollar, but the central bank enacted capital controls that stabilized its value.

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