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Dec 11 2014, 1.22pm GMT


The Central Bank of the Russian Federation (Bank of Russia) raised the interest rate by 1% to steady the ruble.

However, the new rate of 10.5% was not enough for the markets who were expecting stronger action. This morning there was a slight increase as speculators looked to the ruble and USDRUB slumped from 55.46 to 54.55 but the momentum did not continue and by 12.30 GMT the pair returned past the 55 mark.

The press release from RCB disclosed the fears Moscow has on Russia’s recession levels and their solution, “In November — early December 2014 the upward movement of consumer prices kept on accelerating. 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.”

If the procedure does not work, they state, “In case of further aggravation of inflation risks, the Bank of Russia will continue to raise the key rate.”

Usually when a Central Bank raises an interest rate it has the effect of supporting the currency; the theory that Russia was acting on through today’s rate increase. However, in this case, both the key rate increase and the currency rise were not as much as expected. In other words, with weak steps, come weak responses.

According to the Bank of Russia estimates, “end of the year inflation will be around 10%. At the same time, the cumulative contribution of ruble depreciation, restrictions on imports and other factors specific for the markets of several food products, to year-to-year consumer prices growth will account for 4.9 percentage points by the year-end. The annual GDP growth rate will amount to 0.6% in 2014.”

The RCB refer to the impact of oil prices and sanctions, “The remaining external political uncertainty and considerable deterioration of external conditions, resulting from oil price drop and foreign financial markets inaccessibility for the Russian borrowers, also have an adverse impact on economic activity.” However, as many Russians can attest to, this has been positive for the domestic market, with the RCB explaining, “Restrictions on the import of certain food items support the relevant industries.”

The RCB refer to a grim time ahead with the following expectations:

·         “During the next three-year period, economic growth will be lower than previously projected in the baseline scenario due to persistently lower oil prices.

·         Annual GDP growth is expected to be close to zero in 2015-2016.

·         Amid persistently restricted access to the international capital markets for Russian companies and relatively cheap energy resources, fixed capital investments will continue to edge lower.

·         Consumption will remain weak.”

In 2017, the RCB see the first signs of a turnaround for the country, “At the same time, the new exchange rate mechanism will set grounds for more rapid adjustment of the Russian economy to changing external conditions.

Economic activity is expected to start recovering in 2017 due to the development of import substituting industries and increase in non-commodity exports.”

MT4 chart: UDSRUB


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