Russia's central bank hikes rate as ruble plummets

Maria Antonova
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The ruble lost around half of its value in 2014 but recovered slightly as energy prices stabilised this year

The ruble lost around half of its value in 2014 but recovered slightly as energy prices stabilised this year (AFP Photo/Alexander Nemenov)

Moscow (AFP) - Russia's central bank on Thursday jacked up its key lending rate again in a bid to stem the ruble's rapid slide and slow rising prices but the currency swiftly sank to fresh lows.

Investors are expected to pull out a total of $240 billion from Russia this and next year, the central bank said, with Russians alone dumping $20 billion worth of their own currency this year.

Just minutes after the bank announced its fifth rate hike this year -- this time from 9.5 percent to 10.5 percent -- the ruble sank to new lows against the euro and the dollar.

Central bank chief Elvira Nabiullina blamed "speculative demand" partly for the ruble's 40 percent plunge since the beginning of this year.

The Russian economy has been battered by Western sanctions over the Ukraine crisis as well as plunging oil prices, and the weakening currency has led to soaring consumer prices.

Inflation is now expected to hit 10 percent for the year, the central bank said, as it promised further rate hikes if consumer prices were to keep rising.

Russia has spent over $5 billion so far this month alone on market interventions to shore up the ruble, and concern is growing at the rate of depletion of its foreign currency reserves, which are down a fifth since the summer of 2013.

Replenishing its reserves is proving tricky as oil revenues have slumped, the country's access to foreign borrowing is severely limited by Western sanctions, and investment has plummeted due to uncertainty over further embargoes.

Using rate hikes as a means to maintain support for the ruble carries the risk of further strangling already anaemic growth -- projected to be "close to zero" through 2015 and 2016.

- 'Fine line' -

Although Western sanctions have contributed to unsettling investors, it is the 40 percent plunge in crude prices since June that has hit Russia particularly hard, as half of the country's revenues stem from energy exports.

The central bank expressed hope that Russia will begin to wean itself off dependency on oil and gas exports and develop industries of its own to replace increasingly expensive imported goods.

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

But investors appeared to be little convinced, and sent the ruble plunging further to a record low of 55.45 against the dollar and 68.98 against the euro after the latest rate hike.

Natalia Orlova, chief economist at Alfa Bank said: "For now the strategy is to increase interest rates at a level slightly beyond inflation, but without affecting the real economy."

Nevertheless, since March, when Russia annexed the Crimean peninsula, the lending rate has gone up by five percentage points.

"The Central Bank has to tread a fine line between tolerating a weaker ruble and not allowing it to spiral out of control," Capital Economics said, adding that oil prices remain a "wild card" in the ruble's performance.

The one percent hike "was the minimum the central bank had to deliver," the analysts said, adding that they expect further raises -- of at least one percent in the first half of 2015.

Russian President Vladimir Putin last week blamed the ruble's fall on "speculators" while Prime Minister Dmitry Medvedev on Wednesday warned against "hysterics", assuring Russians that he keeps his own savings in the national currency.

Nabiullina said the ruble is undervalued by 20 percent, and that Russia's embargo on Western foods and the Russian currency's devaluation account for almost half of the inflation -- 2.3 percent and 2.6 percent, respectively.