Russia raises interest rates as ruble declines

Russia raises interest rates as ruble declines

Russia raised interest rates to 12% following the decline of ruble to its lowest level in 16 months.

On Monday, the ruble crossed the 100-dollar mark, causing Russia’s central bank to call an urgent meeting.

The Bank of Russia said that it had increased interest rates from their previous level of 8.5% in order to combat August’s 4.4% inflation rate.

The Russian economy is under increasing pressure as a result of increased imports that are outpacing exports and escalating military expenditures related to the conflict in Ukraine.

“Steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has impact on the ruble’s exchange rate dynamics through elevated demand for imports,” the Bank of Russia said in a statement.

The bank said “inflationary pressure” was building, but that its target was to bring inflation, which is the rate prices rise at, down to 4% by 2024.

Western countries have targeted Russia with sanctions following its invasion of Ukraine in February 2022.

The ruble plummeted after war first broke out, but capital controls and oil and gas exports bolstered it.

Since the invasion of Ukraine, it has, however, lost approximately a quarter of its value relative to the US dollar; and this week, one would need more than 100 rubles to purchase one dollar.

The currency somewhat strengthened on Tuesday to 98 rubles to the dollar, although it is still significantly weaker than it was a year ago.

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The Bank of Russia has a history of aggressively raising interest rates. The bank increased interest rates from 9.5% to 20% when Russia first attacked Ukraine, but soon started lowering them.

But the latest hike will only have a temporary impact, according to Mr. Liam Peach, senior emerging markets economist at Capital Economics.

“Russia will struggle to attract capital inflows because of sanctions,” he said.

Analysts have said a major factor in the ruble weakening has been Russia’s trade, and therefore its economy, being hit by Western sanctions.

Since the outbreak of war, many EU countries which relied on Russian oil and gas have pledged to wean themselves off imports from the country and find alternative suppliers.

Russia has also been cut off from Swift, a global payment system used by hundreds of financial institutions, as part of an EU proposal to reduce the amount it can make from oil exports.

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