Russian Central Bank unexpectedly raised interest rates

September 17, 2018 8:00 pmComments Off on Russian Central Bank unexpectedly raised interest ratesViews: 14

Russian Central Bank The Russian Central Bank unexpectedly raised interest rates for the first time since 2014, following central bank policy in emerging markets, as inflationary risk is rising in conditions of devaluation and threat of the US sanctions.

The key interest rate in the country was increased from 7.25% to 7.50%. The central bank even said they would “consider the need for further increases”.

Given what is happening in the markets, the investors expect to see some kind of reaction.

The Russian central bank closed the page of almost four-year money facilities after the US sanctions imposed on the country in April raised inflationary risks.

The Central Bank governor Elvira Nabiullina chose to raise interest rates, despite the calls of senior civil servants, that would not happen. A Kremlin economic advisor called this move “highly undesirable”.

The Russian ruble has lost more than 8% of its value since the last Central Bank meeting in late July. After today’s decision, the Russian currency appreciated by 0.6% against the USD dollar, but anyway, the expectations of instability of the rate are significant.

The central bank estimates that any drop of 10% in the value of the ruble can add 1% to inflation. In addition, the tax increases in the country from January 1 next year are expected to add 1.5 percentage points to the rise in prices.

The inflation expectations among households, which the central bank calls the “pillar” of its interest rate decisions, rose already in August to 9.9% – more than three times higher than current inflation rates, and this is the highest reading of data for nearly a year.

In addition to facing the risks in the economy by raising interest rates, the central bank recently used other instruments to support its depreciating currency. It temporarily stopped buying the currency by the end of September, but it was decided on Friday to extend this deadline by the end of the year.

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