Sign up for our free Russian economy updates and stay informed with the latest news every morning. In an extraordinary meeting, Russia’s central bank has raised its key interest rate by 3.5 percentage points to 12%, following the fall in the rouble. The currency saw some strengthening before and after the rate rise, which exceeded market expectations. However, the rouble has since pared some of its gains and is currently trading at Rbs98 to the dollar. This recent collapse in the rouble highlights concerns about Russia’s economic prospects, especially in light of President Vladimir Putin’s invasion of Ukraine. Economic policymakers in Russia are currently facing the challenge of balancing economic growth, dealing with Western sanctions, and keeping the rouble stable. The central bank has stated that it may need to further increase interest rates in order to stabilise the currency and manage inflation risks. The bank also believes that excess rouble liquidity is driving up imports and contributing to price pressures. After experiencing a recession last year, Russia has relied on borrowing at low interest rates to fund its recovery and military activities, which has resulted in inflation and a weakened rouble. The central bank wants to limit these risks to maintain price stability and meet its target of reducing inflation to 4% next year. Whether to raise interest rates further will be based on inflation data and Russia’s ability to adapt to Western sanctions and other risks. Analysts expect the tightening cycle to be brief due to the higher-than-expected rate increase. The rate rise will have a negative impact on Russia’s growth but will help control inflation risks. With limited tools to support the rouble following the freezing of foreign currency reserves by Western countries, Russian policymakers have halted foreign currency purchases to reduce volatility. The depreciation of the rouble is largely due to Russia’s shrinking current account surplus, which has led to increased reliance on imports and factors that drive inflation. Measures to lower excess rouble liquidity will also be necessary. The central bank’s decision is not expected to substantially impact the rouble’s exchange rate in the short term. Critics have expressed concerns about the depreciation of the rouble, but the government is reluctant to cut spending on social or military programs. Russia’s options to stop the depreciation of the rouble are limited to non-market mechanisms such as capital controls. However, the central bank could resort to unconventional measures if necessary.
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