News You Really Need To See: “Interest Rate Rises to 17% in Russia”

“Interest Rate Rises to 17% in Russia”

The New York Times, December 16, 2014, p.B1

“Russia has a new enemy: the currency markets.  Russia’s government is in the middle of an all-out fight to preserve the value of the ruble in the face of plummeting oil prices and Western sanctions over the Ukraine crisis.  In the boldest move yet to stanch the bleeding, the Central Bank of Russia announced a stunning interest rate increase in the middle of the night.  Its main deposit rate is now 17 percent, up from 10.5 percent when Russian banks closed for business on Monday.  The rate increase, one of the largest ever announced by the central bank, echoes the drastic measures taken during the 1998 crisis when Russia defaulted on its debt and devalued the ruble.  The question is whether the move — announced on the central bank’s website at 1 a.m. in Russia — will appease the markets.  If it doesn’t, investors may view the rate increase as a sign of increasing disarray.  Some economists are concerned that Russia is now stuck in the quagmire of stagflation, or high inflation and low growth.  The government expects inflation of 10 percent or more by the end of this year and for the country to fall into a recession next year.  In a worrying sign, Russians have been buying up big-ticket items as the ruble depreciates, converting savings into consumer goods lest their savings become worthless.  Appliance stores in Moscow have seen runs on refrigerators, washing machines and televisions. … The central bank, led by Elvira Nabiullina, is hoping that the large rate increase will encourage Russian individuals, companies and banks to hold savings in rubles, rather than moving them into dollars. … But the surprise rate increase also underscores the limited options for Russian policy makers.  The central bank has spent at least $75 billion this year to prop up the ruble, with little effect.  The ruble plummeted yet again on Monday, by more than 10 percent, to about 64 per dollar.  The ruble has lost nearly half its value since the start of 2014.”

Quickie Analysis:  I wouldn’t look for any help from the international community on this one.

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