The Central Bank of Russia ratcheted up its key interest rates by a hefty 3.5 percentage points to 12 percent on Tuesday as it moved to bolster a crumbling ruble.
The panicked response, during an emergency meeting of the bank, came after the ruble weakened beyond a critical psychological level of 100 to the dollar on Monday, hitting 102.25 and a 16-month low.
The combination of a weak currency and a diminishing current account surplus, which measures the difference between what a country imports and exports, are now contributing to inflation in the Russian economy.
The deterioration is the result of both weaker commodity prices and Russian commodity exports being curtailed by sanctions. This comes despite Russian crude, known as Urals grade, trading above the internationally agreed price cap of $60 since mid July.
The worsening inflation outlook is, however, likely to be met with swift and assertive action from the CBR. The central bank’s governor, Elvira Nabiullina, earned begrudging respect from international peers for successfully curtailing 17.8 percent inflation at the outset of Russia’s full-scale invasion of Ukraine in February 2022, by raising interest rates aggressively to 20 percent.
The move saw inflation fall to 2.3 percent by April this year, well below the central bank’s official target of 4 percent. But Nabiullina has since warned inflationary headwinds are on the return, with the central bank confirming on Tuesday that inflation on an annual basis in August had notched back up to 4.4 percent.
The CBR warned that if domestic demand for goods and services continued to outstrip Russia’s capacity to supply them in the short term this would elevate demand for imports and potentially weaken the ruble even further. This in turn introduced a “substantial” risk that inflation would rise above 4 percent in 2024, it said.
At publication time the rate hike had failed to meaningfully reverse the course of ruble weakening, with the currency trading at 98.8 to the dollar, relative to a low of 102.25 the previous day. That’s nearly half the value it traded at in June 2022, when it was worth 54 rubles to the dollar.
