Russia central bank in surprisingly big rate hike

AP News
Posted: Oct 31, 2014 8:51 AM

MOSCOW (AP) — Russia's central bank on Friday raised its main interest rate more than anticipated in its latest attempt to shore up the plummeting national currency.

The bank lifted its main rate by 1.5 percentage points to 9.5 percent — a sharp increase that far surpassed market expectations. The move comes in the wake of the ruble's fall earlier this week to an all-time low of 43.4 rubles per dollar. Since then, the currency has recovered somewhat to 42 rubles but it remains volatile.

The ruble strengthened after the bank's move, but soon sank again reflecting the fundamental factors that have driven it down over the past few months — falling oil prices and continuing tensions over Ukraine.

U.S. and European sanctions in response to the Kremlin's annexation of Ukraine's Black Sea peninsula of Crimea and support for a pro-Russian insurgency in eastern Ukraine have hurt the Russian economy that was already teetering on the brink of recession. Investor confidence has been eroded and capital flight has accelerated.

The bank has been eating through its hard currency reserves, spending billions of dollars to support the ruble. Since March, it has raised the rate from 5.5 percent, but the currency has kept falling.

While helping shore up the currency and rein in inflationary pressures, the interest rate hike could hurt economic growth by making loans more expensive.

In a bid to assuage criticism over such prospects, the bank promised to reduce interest rates in the future if external conditions improve and inflation stabilizes.

"We do expect monetary easing over the course of next year," said Michal Dybula, an economist at BNP Paribas.