The Fifth Russian Interest Rate Hike since March

December 11, 2014

Never mind that Russia is in a severe recession caused by its own geopolitical mischief and plunging oil prices on world markets.  A full-blown currency crisis is fanning higher inflation, leaving officials at the  Bank of Russia no choice but to raise interest rates sharply in an attempt to stem heavy capital outflows.  The key interest rate was lifted from a base of 5.5% at the start of 2014 by 150 basis points in March, 50 bps in April, 50 bps in July, 150 basis points in November, and now another 100 basis points to 10.5%.  So far, these efforts to stop the inflationary vicious cycle have been in vain.  The ruble, which has dropped over 40% this year against the dollar, hit a new low after today’s announcement.  The plight of officials is summarized in today’s statement:

Observed increase in inflation expectations and ruble depreciation expectations pose substantial inflation risks. The decision taken by the Bank of Russia is aimed at slowing consumer prices growth to the target of 4% in the medium run. In case of further aggravation of inflation risks, the Bank of Russia will continue to raise the key rate…. Over the next months, prices for goods and services will continue to be affected by depreciation of the ruble. During the first quarter of 2015 inflation might be higher than 10%.

The statement goes on to predict that the inflation spike will run out of momentum and eventually recede later next year.  The problems with such thinking is that Putin isn’t about to back down from the aggressive stance on surrounding neighbors, and the drop in world oil prices appears fundamentally grounded and unlikely to reverse or stop.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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