Russia raises interest rates after 2014

For the first time since 2014, Russia has raised its interest rates and lifted their benchmark to 7.5 per cent from 7.25 per cent.

Background

In 2014, the main deposit rate was increased to 17 percent, up from 10.5 percent.  The rate increase was one of the largest ever announced by the central bank reflecting on the drastic measures taken during the 1998 crisis when Russia defaulted on its debt and devalued the rouble.

Analysis

The central bank in a statement said that it was compelled to intervene after inflation rose to 3.1 per cent in August, above its predictions.

In addition, Governor Elvira Nabiullina, who first raised the possibility of a rate hike earlier this month, said easing may not resume for more than a year. He also noted that, “The quick monetary-policy response will limit the growth of inflationary risks in the future and create the conditions for easing policy by the end of 2019 or the first half of 2020.”

The central bank also highlighted that another factor for this hike is the higher pay-outs on rouble-denominated government bonds, or OFZs, after foreigners worried about US sanctions sold off the bonds en masse.

Assessment

Our assessment is that political pressure is increasingly affecting the currencies worldwide. The rouble sank below Rbs70 to the dollar this week.