Russia raises interest rates to 12% as the rouble falls in value.
On Monday, the ruble plummeted below $100 per dollar, leading Russia’s central bank to convene an emergency meeting.
The Bank of Russia announced a decision to hike interest rates from 8.5% to 4.4% in order to combat inflation, which reached 4.4% in August.
The Russian economy has been under pressure as imports have risen faster than exports and military spending for the Ukraine war has increased.
“Steady growth in domestic demand surpassing the capacity to expand output amplifies underlying inflationary pressure and has an impact on the rouble’s exchange rate dynamics through elevated demand for imports,” the Bank of Russia stated in a statement.
The bank stated that “inflationary pressure” was rising, but that its goal was to reduce inflation, or the rate at which prices rise, to 4% by 2024.
Western countries have sanctioned Russia in response to its invasion of Ukraine in February 2022.
The rouble plunged after the war began, but it was supported by capital controls and oil and gas exports.
However, it has lost around a quarter of its overall value versus the US dollar since Ukraine’s invasion, and this week more than 100 roubles were required to purchase one dollar.
The Russian rouble has dropped to a 16-month low.
There is no need to panic about the rouble, but its slide will impact Russians.
The currency gained slightly on Tuesday, reaching 98 roubles to the dollar, but it remains significantly weaker than it was last year.
It is not the first time the Bank of Russia has raised interest rates aggressively. When Russia first attacked Ukraine, the bank boosted interest rates from 9.5% to 20%, but soon reduced them.
According to Liam Peach, senior emerging markets economist at Capital Economics, the latest boost will have only a short-term impact.
“Sanctions will make it difficult for Russia to attract capital inflows,” he said.
According to analysts, one important driver in the rouble’s depreciation has been the impact of Western sanctions on Russia’s commerce, and hence its economy.
Since the commencement of the war, many EU countries that rely on Russian oil and gas have committed to reduce their reliance on the country and seek other suppliers.
EU leaders proposed a price cap proposal to limit Russia’s earnings from oil exports, and the country was also barred from using Swift, an international payment system used by hundreds of financial institutions.