Russia Raises Interest Rate Amid Economic Woes

Written By Unknown on Jumat, 12 Desember 2014 | 12.06

The Bank of Russia has increased its key interest rate to 10.5%, to help spur the economy amid sanctions and sliding oil prices.

The bank raised the rate from the previous figure of 9.5%.

It confirmed it would also continue to raise the rate even higher if inflation continues to accelerates.

The central bank predicted inflation reaching 10% by year's end due to the plunging value of the rouble, and now expects growth to be flat through to 2016.

"Annual GDP growth is expected to be close to zero in 2015-2016," the bank said in a statement.

It cited depreciation of the currency and the "external conditions" of Western sanctions over the Ukraine crisis and sliding oil prices.

The rouble dropped to new record lows against the US dollar on Thursday after the announcement was made.

The rate rise is insufficient to thwart further currency pressure, according to Rabobank International emerging markets foreign exchange strategist Piotr Matys.

"This is not enough to stabilise the rouble and increases the risk of a full-scale currency crisis," Mr Matys told Sky News.

"The central bank may intervene more aggressively on the market.

"But selling hard currencies already proved an insufficient tool as reflected in the worst rout since the 1998 crisis and the sharp drop in Russia's foreign reserves of almost $80bn (£64bn) so far this year."

Experts believe the central bank may need to raise rates again, at the next planned meeting on January 30, as more pressure is applied.

Mr Matys added: "In the meantime, the central bank is likely to continue selling US dollars to stem the pace of rouble depreciation, which will inevitably lead to another fall in Russia's foreign reserves."

Brent Crude inched above $65 a barrel on Thursday, as the slide in prices approaches six months.

Russia gets much of its foreign currency from petroleum products and the drop towards five-year lows further exacerbates the problems caused by sanctions.


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