After a massive overnight rate hike by Russia’s Central Bank, the ruble staged a two-hour rally Tuesday morning before rolling back to new historic lows.
The surprise Central Bank decision to raise the rate to 17 per cent from 10.5 per cent came in the early hours on Tuesday in a desperate attempt to prop up the troubled currency. It’s the biggest interest rate hike since 1998, the year when Russia defaulted on its sovereign bonds.
The move was meant to make it expensive for currency traders to buy rubles and sell them on the market.
The ruble in the morning regained almost all of its losses from Monday’s 10 per cent decline, the biggest fall since the 1998 economic meltdown. But it rolled back and was down 3 per cent at 66 to the dollar by noon in Moscow (0900GMT).
Central Bank chairwoman Elvira Nabiullina said in televised comments on Tuesday that the decision should stem inflation and encourage Russians to open ruble-denominated deposits.
Ms. Nabiullina conceded that the ruble’s value will not be immediately influenced by the rate hike and said it will take the ruble “some time” before it finds a fair value.
The ruble has lost half of its value this year and the decline intensified in the past months as the economy came under pressure from Western sanctions and plunging oil prices.
“With these steps, the Central Bank is looking to bring stability back to the (foreign exchange) market, which has been behaving irrationally over the last few weeks,” Moscow-based investment bank Sberbank-CIB said in a morning note. “This state of affairs required extraordinary measures from the Central Bank and such measures have now been taken.”
Neil Shearing, a chief economist for emerging markets at London-based Capital Economics, said in a note on Tuesday that the hike does not eliminate the risks to the currency such as the prices of oil and will cause “a further tightening of credit conditions for households and businesses and a deeper downturn in the real economy in 2015.”
Demand for durable goods, an overwhelming majority of which is imported, shot up in the past months as major retailers have announced upcoming price hikes. Major automotive dealers, for one, are reporting sales up 15 to 30 per cent in November, according to RIA Novosti news agency.
Russian stocks were moderately declining Tuesday morning with the MICEX benchmark 1.5 per cent lower, reflecting the rate hike’s pressure on businesses.
A decline in the price of oil has weighed heavily on the Russian economy as Russia depends on oil revenue and lacks the diversification to withstand severe economic downturns. The average price of a barrel of oil has dropped below $56 from a summer high of $107. The government recently downgraded its forecast for next year, predicting that the economy will sink into recession.
Russia’s largest oil company Rosneft late last week raised 625 billion rubles ($9.5 billion) in bonds at yields below those on equivalent government securities. The Central Bank approved the securities to serve as collateral in a Monday ruble auction, meaning bondholders will have access to central bank cash.
Market watchers blamed the deal for fuelling the decline on Monday.
The company, however, denied allegations that it was dumping rubles because of the economic situation, saying that it does this “exclusively for attracting financing for its projects in Russia” and pledged that “not a single ruble... will be used to buy foreign currency.”
The central bank has gradually raised the rate from 5.5 per cent early this year. Last Thursday, it tried unsuccessfully to stem the ruble’s slide by boosting its key rate by 1 percentage point to 10.5 per cent.
The rate increase, although it can help stabilize the ruble, could spell serious economic troubles ahead, making it more expensive for companies to borrow funds.
Alexei Kudrin, Russia’s finance minister in 2000-2011, said on Twitter following the rate hike that “the fall of the ruble and the stock market is not just a reaction to low oil prices and the sanctions but also (a show of) distrust to economic policies of the government.”
Kudrin added that the rate hike “should be followed by government measures to raise investor confidence in the Russian economy.” He did not say what steps he advocated.
