Russia's central bank raises rate

Russia's central bank on Friday jacked up its interest rates by 1.5 percentage points to 9.5 percent in a bid to shore up its currency, after Western sanctions over Ukraine sent the ruble plunging and halted growth. But the biggest rate hike since March failed to stem the ruble's slump as the currency hit a new low of more than 43 rubles to the dollar on Friday afternoon after a short-lived rally.
The ruble has lost more than a fifth of its value since the beginning of the year, sliding by 6.5 percent this month alone as the embargo imposed by the West takes its toll. The sanctions have not only capped output but also sent investors fleeing, with the IMF predicting capital flight to top $100 billion for the year. The economic turmoil has been compounded by the slump in oil prices to around $85 per barrel as Russia is heavily reliant on energy revenues. That level is well beneath the $100 per barrel mark - the price at which Russia needs to shore up its public finances.
Consumers are starting to feel the pinch directly, as the ailing ruble is translating into higher prices and inflation is predicted to stay above 8 percent until March next year. The central bank issued an equally bleak outlook for output, saying growth would be flat from the last three months of 2014 through to the first quarter next year. Alarmed by the plunging ruble, the central bank has spent billions of dollars in recent weeks to shore up the currency.
Since the beginning of October, it has thrown some 30 billion dollars at the problem without success. The new interest rate of 9.5 percent, a hike that was higher than predicted by analysts, will take effect on November 5. The hike is designed to encourage Russians to save and to attract foreign investors. But experts were sceptical of its effectiveness.
Pointing to the ruble's downward slide despite the announcement, Rosbank analyst Yevgeny Koshelev was quoted as saying by RIA Novosti news agency: "We see confirmation of our suspicion that raising the interest rate has little effect on the ruble." Banking analyst Mikhail Kuzmin of Investcafe.ru was more positive. "I expect that the ruble will start rallying slightly - possibly up to 41 or 40 to the dollar," he told AFP.
"Raising interest rates is a method that can help and doesn't harm. It's better than spending our dollars on foreign currency interventions that wouldn't help," he said. Neil Shearing of Capital Economics called the central bank's action a "bold move" but expressed doubt that it would work to stem the ruble's fall. "The external environment is likely to remain extremely challenging," he said.
"The big falls in oil prices may be behind us, but we expect them to remain around their current lows for the foreseeable future. At the same time, capital outflows are likely to remain high. All of this is a recipe for a weak ruble," he added. For Vladimir Kolychev of VTB Capital Research, the bank had risen interest rates principally for "financial stability considerations."