Russia's ruble under pressure despite rate rise

AP News
Posted: Dec 11, 2014 12:47 PM
Russia's ruble under pressure despite rate rise

MOSCOW (AP) — The ruble hit another record low against the dollar Thursday even after Russia's Central Bank sought to ease the selling pressure on the currency by raising interest rates again.

The currency has been plunging in recent weeks in the wake of the sharp fall in oil prices. The Russian economy and the government's budget plans are hugely dependent on oil-related revenues.

The Central Bank raised its key interest rate by a percentage point to 10.5 percent, citing an increasing rise in consumer prices and "significant inflation risk." The bank said inflation is expected to hit 10 percent for 2014 and rise further in the first quarter of 2015. A falling currency can stoke inflationary pressures by increasing the price of imports.

Despite the rate rise, the ruble continued its slide. The currency broke above 55 rubles to the dollar for the first time ever as it struck its new all-time low of 55.80, a one-day decline of 1.5 percent. And against the euro, it was heading toward the 70 ruble threshold for the first time, hitting 69.14 rubles to the euro. Russian stocks were down sharply and the RTS stock index closed 3.6 percent lower.

Fitch Ratings said the latest rate rise highlights the challenges posed from rising inflation and the falling ruble.

"These are set to increase in 2015 as the economy deteriorates, downside risks accumulate, and inflation reaches double digits," it said. "The ruble fell to a record low against the dollar immediately after the decision, and the rise will constrain domestic demand and hasten the move into recession."

The ruble has lost more than 40 percent of its value since January, battered by Western sanctions imposed over the conflict in eastern Ukraine and the drop in the price of oil.

The Central Bank said it would continue to raise its key rate "in the case of further aggravation of inflation risks."

According to Russia's Central Bank, the Russian economy is unlikely to see any growth in 2015 or 2016. The Russian government recently revised its economic forecast for next year, predicting a drop of 0.8 percent instead of 1.2 percent growth.