2023-09-15 15:30:00
Russia’s Central Bank (BCR) said on Friday it was raising its key interest rate from 12% to 13%, the third consecutive increase in less than two months, to counter inflation and a weakening ruble amid international sanctions over the war in Ukraine, according to AFP.
Vladimir Putin with Elvira NabiullinaPhoto: Mikhael Klimentyev / Sputnik / Profimedia Images
“We expect the growth rate to be more moderate in the second half of the year,” its director, Elvira Nabiullina, also admitted in a press conference.
Earlier on Friday, its staff had announced in a press release that, given the “high inflationary pressure (…)” and the “weakening of the ruble this summer”, “further tightening of monetary policy is necessary”, thus raising key rate at 13%.
The decision comes just days after Vladimir Putin said he saw no “insurmountable problems” with the ruble, after arguing for a year and a half that the multiple sanctions that have hit Russia since its assault on Ukraine had failed to cause lasting damage to the Russian economy.
However, despite two consecutive increases in the key interest rate by the Central Bank, the first on 21 July (from 7.5% to 8.5%), followed by an emergency increase in mid-August to 12 %, the national currency remains at very low levels in relation to the dollar and the euro.
On Friday, one dollar was 97 rubles and 103.1 to the euro, levels almost as low as in March 2022, following the wave of sanctions that hit the Russian economy in retaliation for the offensive in Ukraine.
This ruble weakness has been inexorably accompanied by a rebound in inflation (up 5.15% in August), which has added to the mounting cost of the conflict in Ukraine, leading many Russians to fear for their level of live.
The causes of the decline
Under these conditions, “returning inflation to the target and stabilizing it near the 4% threshold also implies a prolonged period of restrictive monetary conditions”, the Central Bank said on Friday, which now expects inflation to be “between 6 and 7%” at the end of the year.
One of the causes of Russia’s difficulties is the considerable decrease in revenues from the sale of hydrocarbons, as a result of sanctions and the determination shown by the Europeans to end their energy dependence on Moscow.
What do the banks say? Market critics
However, Friday’s announcement is unlikely to please all of Russia’s big patrons.
In recent days, the general director of the main bank of the country, Sberbank, Herman Gref, and Andrei Kostin, the head of its rival VTB, had declared in favor of keeping the key rate at 12%.
Gref warned earlier this week that “the measures taken by the central bank to maintain financial stability will inevitably affect economic growth, and this will be felt by all companies and banks alike”, due to the increase in the cost of credit and therefore investment .
In recent months, Elvira Nabiullina has been at odds with Finance Minister Anton Siluanov, who is in favor of stricter control of capital movements in the country, while Nabiullina believes that the government should not intervene in the national economy more more than necessary, at the risk of weakening it.
In mid-August, after the previous key interest rate hike, the two leaders met with Vladimir Putin, agreeing on a temporary status quo, waiting to see how the indicators evolve.
A month later, the Bank was forced to make a decision, and the authorities may even decide to do more than change the key rate.
The Finance Ministry is pushing for the reintroduction of the obligation for large Russian exporters to repatriate and convert foreign currency earnings into rubles, forcing them to stop storing them outside Russia, despite sanctions, so that these earnings can be integrated into the Russian economy and support the ruble.
At the beginning of 2022, the Central Bank had already introduced such a mechanism in an attempt to limit the effects of heavy international sanctions, before phasing it out, satisfied by macroeconomic indicators.
“Contrary to popular belief, the monetary structure of export payments does not have a significant impact on the dynamics of the exchange rate,” Nabiullina replied on Friday.
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