Russia’s central bank raised interest rates today for the first time since 2008, signaling that inflation concerns now outweigh sluggish credit growth and rouble appreciation as the bank’s chief preoccupation.
Then bank raised rates by 25 basis points Friday, to 8 per cent, ending a two year cycle of rate cuts begun in April 2009 when the bank began cutting its benchmark refinancing rate from 13 per cent to 7.75 per cent in May. Rates have been on hold for the last 8 months.
Those rate cuts helped to stimulate GDP growth which collapsed during the 2009 economic crisis, but now, with inflation at 9.7 per cent year on year this month, the bank is clearly more worried about the risks of continued price growth and the erosion of real incomes than improving the sluggish if positive economic growth rate.
In raising rates, the bank had to carefully weigh the risks of stimulating the “carry trade” according to Alexei Moisseev, chief economist at VTB Capital, the Russian investment bank, which could cause the rouble to strengthen. With oil prices over $100 a barrel, he said, many see the risk of speculative capital inflows to Russia, driven by a strengthening rouble, as increasingly risky.
It will also put downward pressure on credit growth, which was flat in January month on month, he said.
Related reading:
Russian government presses for rate rise, Money Supply
Russia cuts interest rates but signals end to easing, beyondbrics
Stefan Wagstyl
Josh Noble
Rob Minto
Pan Kwan Yuk
Jonathan Wheatley
Heba Saleh