In Fear of Sanctions, Russia's Central Bank Raises Key Interest Rate
Published: July 26, 2014 (Issue # 1821)
Russia's Central Bank on Friday unexpectedly raised its key borrowing rate for a third time this year in expectation of heightened international economic sanctions against Russia over the unrelenting crisis in Ukraine.
Russia's main financial regulator increased the key rate from 7.5 to 8 percent, saying that even in the present situation of slowing economic growth, quelling inflation is its main priority.
The decision comes as Russia is embroiled in the worst political standoff it has seen with the West since the end of the Cold War. The downing of Malaysia Airlines flight MH17 in conflict-torn eastern Ukraine on July 17, which led to the deaths of all 298 people on board, has prompted the United States and European Union to consider more wide-ranging sanctions against Russia unless the government cooperates on de-escalating the conflict.
"Inflation risks have risen, connected, among other things, with the increased political tension and with its possible impact on the dynamics of the national currency rate, as well as with the changes in tax and tariff policies that are being discussed," the Central Bank said in a statement on its website.
"This decision is both unexpected and controversial," Alexander Morozov, chief economist for Russia and the CIS at HSBC, told The St. Petersburg Times.
EU ambassadors on Friday reached a preliminary decision to move ahead with economic sanctions, with likely measures to include closing off EU capital markets to state-owned banks and halting future arms sales to Russia, Reuters reported.
According to Morozov, raising the key interest rate was a drastic response to the phantom risk of sanctions, whose content and possible effects cannot yet be known.
"The Central Bank still had other means to deal with inflation, such as making its control of the banks more efficient," he said.
The Central Bank has already increased its key rate from 5.5 to 7 and then to 7.5 percent this year in an attempt to counter the impact that the depreciating ruble has had on the price of imports. The ruble fell 10 percent against the dollar and euro in the early months of this year but has since recovered some ground, hovering around 35.15 to the dollar and 47.18 to the euro on Friday evening.
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