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Russian Central Bank Raises Interest to 12% Amid Rouble Crisis

In an urgent move to support the falling rouble, Russia's central bank has dramatically raised its key interest rate to 12%. Here's a detailed look at the various factors behind this decision and its potential implications.

Russian Central Bank
Russian Central Bank

Key Decision: Russian Central Bank's Hike to 12%

Russia's central bank hiked its key interest rate by 350 basis points to 12% on Tuesday, an emergency move to try and halt the rouble's recent slide after a public call from the Kremlin for tighter monetary policy.

The Rouble's Plummet: Impact of Sanctions and Military Spending

The extraordinary rate meeting came after the rouble plummeted past the 100 thresholds against the dollar on Monday, dragged down by the impact of Western sanctions on Russia's balance of trade and as military spending soars.

Currency Recovery: The Rouble's Position Post-Decision

The rouble pared gains after the decision to stand 0.5% weaker at 98.16 by 1056 GMT, but still significantly above lows near 102 on Monday which had not been hit since the early weeks after Russia invaded Ukraine.

Kremlin's Criticism: Central Bank's Monetary Policy

President Vladimir Putin's economic adviser Maxim Oreshkin on Monday rebuked the central bank, blaming what he called its soft monetary policy for weakening the rouble. Hours after Oreshkin's words, the bank announced the emergency meeting, throwing the currency a lifeline.

Inflation Concerns: The Central Bank's Statement

"Inflationary pressure is building up," the bank said in a statement on Tuesday. "The pass-through of the rouble's depreciation to prices is gaining momentum and inflation expectations are on the rise."

Analyst Opinions: Long-Term Impact of the Rate Hike

Though stopping the rot, analysts largely agreed that the move would not have a long-lasting impact. Many pointed out that hiking policy rates might temporarily slow the rouble's depreciation but won't solve the core problems facing the Russian economy.

Future Rate Changes: Bank's Stance and Speculations

In its original statement, the bank removed its usual hawkish guidance that it would consider future rate hikes but later noted that additional increases in the key rate could be possible, sparking speculation among analysts.

Leadership Pressures: Central Bank Governor's Challenge

Central Bank Governor Elvira Nabiullina has won praise for her handling of the economy, but the plunging rouble and high inflation have challenged her position, especially among pro-war nationalists. The Kremlin's criticism further adds pressure.

Political Angle: Economics or Politics Behind the Decision?

Economists and analysts discuss whether the decision was driven by purely economic considerations or if there was also an element of politics involved, especially in light of the Kremlin's public criticism and the upcoming presidential election.

Inflation History: The Road to the Current Hike

The bank's past moves to address inflation, including an emergency rate hike to 20% in February 2022, subsequent reductions, and a recent hike to 8.5% are detailed. Current inflation is above the central bank's 4% target and quickening.

Struggling Economy: Budget Deficit, Labour Shortage, and Currency Slide

Russia's widening budget deficit, stark labor shortage, and the rouble's rapid slide have contributed to rising inflationary pressure, pushing the central bank to act. Past attempts to limit the decline were deemed too minimal to support the currency significantly.

Temporary Relief? Analysts on the Effectiveness of the Hike

"Today's rate hike will only temporarily slow the bleeding," said one economist. The challenges of attracting capital inflows due to sanctions and limited ammunition for FX intervention are explored, casting doubt on the overall effectiveness of the rate hike.