Russia Raises Interest Rates to Fight Burgeoning Inflation
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Reeling under unforgiving inflation forced Russia to increase the country’s key interest rate to 10.5%, which is one percentage point higher than the current interest rate. This is the second time in the last couple of months that Russia’s Central Bank has had to take such a measure. Note that just six weeks back, interest rates increased from 8% to 9.5%, shocking consumers.
Reeling under unforgiving inflation forced Russia to increase the country’s key interest rate to 10.5%, which is one percentage point higher than the current interest rate. This is the second time in the last couple of months that Russia’s Central Bank has had to take such a measure. Note that just six weeks back, interest rates increased from 8% to 9.5%, shocking consumers.
The double impact of falling oil prices that have taken the fizz out of Russia’s oil exports and sanctions over Ukraine that sent the Russian economy into the doldrums is causing volatile inflation. Higher interest rates expect to cut consumption and dissuade prices from rising as quickly. The Russian economy now appears on the brink of a recession. This is similar to New York and California’s situation. High interest rates are a double-headed dragon as they also slow economic growth.
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Understanding Russia’s Economic Dilemmas
Russia is in a situation where it faces two economic challenges that warrant exactly opposite corrective measures. Whereas the dwindling economy demands incentives for investments, such as low interest rates and lower government control, the demons of inflation require higher interest rates. To make matters worse, the ruble has been free falling in the currency exchanges, trading at 68.98 against the Euro and 55.45 against the US dollar.
That is after Russia’s desperate attempts to arrest the fall of the ruble, with conformation in the news about the Russian government having spent close to $4.5 bln to support its currency in exchange markets. This takes the amount of government spending towards strengthening the Ruble to $70 bln in 2014.
No Respite for Russian Economy in the near Future
Curbing interest rates will only come from a strengthening economy and a strong ruble. However, considering OPEC’s intention to not slow oil production and Ukraine sanctions continuing for the coming year, both these outcomes seem distant. Moreover, with food imports from the west banned, there is hardly anything positive for the Russian finance ministry to look to in terms of any way to bring inflation down.
Russia has Seen Better Days
Even internal factors are not supporting Russia’s measures to increase interest rates, as manufacturing productivity has taken a hit and is recovering too slowly, thus leaving little space for retailers to lower prices. As per a statement issued at the official website of the Bank of Russia, interest rates could continue to rise if the risks of inflation do not mitigate. Annual inflation at the end of the first week of December stands at 9.4%.
