Published On: Tue, Dec 16th, 2014

Russia Raises Key Interest Rate To 17% amid Rouble Decline

The Russian central bank has announced it is increasing its key interest rate from 10.5% to 17%.The bank said the move was to try to ease the rouble’s recent descent in value.

Russia raises key interest rate

The Russian rouble has dropped to a new low against the US dollar, as falling oil prices and Western sanctions continue to weigh on the country’s economy.

It snapped back to 60 roubles per dollar from a low of 67 earlier.

The 60 mark is considered a “psychological barrier” for Russia’s national currency, says the BBC’s Moscow correspondent, Steve Rosenberg.

Since the start of the year, the rouble has lost more than 45% of its value against the dollar.

Analysis: Steve Rosenberg, Dailyreleased, Moscow

When Russia’s Central Bank raised its base rate by one percentage point last week, it was like a doctor giving a seriously ill patient a headache tablet.

Now, it seems, the bank has reached for the defibrillator.

The 6.5% rise of the key rate to 17% is a desperate measure. But then the situation is looking increasingly desperate.

On Monday the rouble suffered its sharpest fall in more than 15 years, losing around 10% of its value against the dollar. Moscow’s RTS share index plummeted 10%.

On the streets of Moscow yesterday there was no sign of panic, there were no queues outside banks. But the Central Bank knows it needs to bolster the national currency to prevent panic from setting in. Hence the large rise in the key interest rate.

But there is a risk. High interest rates slow economic growth, and that’s not good with Russia on the verge of recession.

Russia’s central bank has tried unsuccessfully to stabilise the currency, buying roubles in the markets.

It has spent more than $70bn (£44.7bn) supporting the rouble since the start of the year.

“This decision is aimed at limiting substantially increased rouble depreciation risks and inflation risks,” the central bank said in a statement. The decision is effective from Tuesday.

The leap in rate follows an increase to the prior rate of 10.5% on 11 December and an increase of 1.5% to 9.5% in October.

The World Bank warned the Russian economy would shrink by at least 0.7% in 2015 if oil prices do not recover.

Raising interest rates has its own risks, as more expensive borrowing can itself slow growth. But it may also stem the tide of money leaving the country.

Oil prices slumped to lows not seen for five-and-a-half years. US benchmark crude West Texas Intermediate traded at $55.91 per barrel, while North Sea Brent crude traded near $60 per barrel. Both markets have fallen by almost half since June.