Russia Takes Drastic Measures As Ruble Tumbles

At an emergency meeting last Tuesday, the central bank in Russia increased interest rates by 350 basis points, raising interest from 8.5 percent to 12 percent as Moscow seeks to stop the plunge of the ruble, CNBC reported.

The ruble dropped to nearly 102 to the dollar last Monday.

In response to the plunging currency, the Bank of Russia announced an emergency meeting. The central bank said its decision to increase interest rates was aimed at “limiting price stability risks” in the face of “inflationary pressure.”

In the first week of August, Russia’s annual inflation rate stood at 4.4 percent. The Bank of Russia said upward pressure is continuing to mount, with price growth over the past three months averaging 7.6 percent year over year while core inflation increased to 7.1 percent.

The central bank’s board said the growth in demand has surpassed output, amplifying “underlying inflationary pressure” and impacting the exchange rate of the ruble “through elevated demand for imports.” This has caused prices to gain momentum while inflation is expected to rise.

The central bank said increasing interest rates should shape monetary conditions and “overall domestic demand dynamics” needed to lower inflation to 4 percent next year while keeping it close to 4 percent in the future.

Anatoly Aksakov, the chairman of the Russian Parliament’s Committee on Financial Markets said in a Telegram post last Monday that the Bank of Russia would begin incremental cutting once the ruble was stabilized and the exchange rate “is under state control.”

By last Tuesday, the ruble strengthened somewhat as investors anticipated a significant tightening of monetary policy from the Bank of Russia before pulling back again. The ruble was trading at around 98 to the dollar by 9:00 am London time last Tuesday.