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Sunday, 21 December 2014

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Russia increases interest rate

Russia's Central Bank made a drastic interest rate move overnight, raising its key rate from 10.5% to 17%. The bank said the move was to try to ease the rouble's recent fall in value.

The rouble lost 50% against the US dollar this year as falling oil prices and Western sanctions continue to weigh on the country's economy.

Before the move, the dollar bought 67 roubles. The rate rise moved it up to 58 against the dollar, although it has since slipped back to 62.

The 60 mark is considered a 'psychological barrier' for Russia's national currency.

Since the start of the year, the rouble has lost more than 45% of its value against the dollar.Most analysts thought the move would work to curb inflation, which is running into double figures.

But it could cause problems in other areas. Neil Shearing, chief emerging markets economist for Capital Economics, said the rate rise, "Could prove to be a turning point in the 2014 rouble crisis".

"The price, however, will be a further tightening of credit conditions for households and businesses and a deeper downturn in the real economy in 2015," he said.

Russia's Central Bank has tried unsuccessfully to stabilise the currency, buying roubles in the markets.It has spent more than US $70 billion (44.7 billion) supporting the rouble since the start of the year.

When Russia's Central Bank raised its base rate by one percentage point last week,it was like a doctor giving a seriously ill patient a headache tablet. Now, it seems, the bank has reached for the defibrillator. The 6.5% rise of the key rate to 17% is a desperate measure. But then the situation is looking increasingly desperate.

On Monday, the rouble suffered its sharpest fall in more than 15 years, losing about10% of its value against the dollar. Moscow's RTS share index plummeted 10%.

On the streets of Moscow yesterday, there was no sign of panic, there were no queues outside banks. But the Central Bank knows it needs to bolster the national currency to prevent panic from setting in.

Hence the large rise in the key interest rate. But there is a risk.

- BBC

 

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