Russia: Central Bank more than doubles key rate after sanctions hammer ruble
At its unscheduled meeting on 28 February, the Board of Directors of the Central Bank of the Russian Federation (CBR) more than doubled its key interest rate to 20.0%. The emergency move, which followed a 100 basis-point hike on 11 February, was an attempt by the Bank to steady the country’s financial market after unprecedented international sanctions sent ruble tumbling to an all-time low.
Following Russia’s invasion of Ukraine on 24 February, Western countries and their allies unleashed severe sanctions designed to cripple the Russian economy. The measures, which included blocking selected Russian banks from SWIFT and freezing Central Bank reserves held abroad, prompted fears of credit default and sent ruble diving to a record low against the U.S. dollar. On 28 March, the RUB depreciated by nearly one-third in the largest one-day move in the currency’s modern history, while the stock market had tanked 40% before trading was halted. In addition to the Bank’s hike, authorities also ordered Russian exporters to sell 80.0% of their foreign currency revenues in a bid to shore up the currency.
Further supporting the Bank’s move was the inflationary backdrop: After rising to 8.7% in January, inflation reportedly jumped above 9.0% in late February, with the fallout from the war in Ukraine set to boost price pressures further in the coming months beyond the effects of a depreciating ruble. Supply disruptions, rising energy prices and dwindling imports of foreign goods and inventories, due to sanctions and companies pulling out of Russia, are set to fuel the price rally.
Commenting on the Bank’s move, Clemens Grafe, economist at Goldman Sachs, noted:
“We, like the CBR, thought that inflation was close to the peak at the 8.7% yoy rate recorded in January, but we now think that it will rise significantly more […]. We raise our end-year inflation forecast to 17.0% yoy. […] The risk to the inflation forecast is likely biased to the upside and will depend on other policy measures to be taken by the CBR and the government, as well as the dynamics of the conflict itself. While for now we pencil in rates to remain at 20.0% till year-end before declining slowly, given the risk to inflation, the risk to rates is also to the upside.”
Meanwhile, following the Bank’s move, economists at SOVA capital said:
“CBR raised the key rate […] to prevent outflows of ruble deposits into FX deposits. CBR mentioned that external. CBR’s tone was neutral, as the situation is likely to largely depend on the balance of risks (both external and domestic), the impact on financial markets, and developments related to inflation and the economy.”
The Bank of Russia will hold its next key rate review meeting on 18 March.