Rouble collapse puts pressure on Bank of Russia to hike interest rates sharply – Bloomberg

The recent sharp decline of the Russian rouble is intensifying pressure on the Bank of Russia to raise its key policy rate, causing possibly the most significant increase since the onset of the war in Ukraine. Source: Bloomberg Details: According to Russia's Central Bank, since 21 November, when the US imposed sanctions on around 50 Russian banks, the rouble has weakened by nearly 8% against the dollar and yuan.

This decline is likely to worsen inflation, which the Bank of Russia is attempting to control by raising interest rates to record levels.

The central bank has stated it is prepared to further raise borrowing costs, currently set at 21%, to the level required to bring inflation back to its 4% target next year. According to Bloomberg, this could mean the next move would be a 25% increase of the rate. Amid fears that the new restrictions would sharply reduce foreign currency inflows, demand for foreign currency on the domestic Russian market has surged.

Government officials have been working to downplay the impact of the weaker rouble, noting its benefits for exporters. However, with inflation more than double the central bank's target, the currency's decline may compel regulators to take action amid already stringent lending conditions.

Since the start of the year, the rouble has depreciated by 19% against the US dollar, becoming one of the worst-performing currencies in emerging markets. Following US sanctions on the Moscow Stock Exchange in June, which led to a suspension of dollar and euro trading, the Bank of Russia has been relying on interbank transactions to determine the exchange rate.

Background:

• The Central Bank of Russia will stop buying foreign currency on the domestic currency market from 28 November until the end of 2024.
• The Russian rouble has dropped by over 24% since the beginning of August, when its decline began, and is likely to continue weakening.
• The new US sanctions against Russian banks have led to a further fall in the rouble, putting the last channels of direct foreign currency inflows into the country at risk.

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