(MENAFN- The Peninsula) Russia's central bank raised its main lending rate by 100 basis points to 10.5 percent yesterday to prop up the rouble but failed to stop the currency sinking to a new low.
The inability to halt the rouble's decline after a fall in oil prices and Western sanctions over the Ukraine crisis pose a growing challenge for President Vladimir Putin as his popularity is partly based on providing stability and prosperity. Putin has declared war on "speculators" and enemies he says are driving the rouble down but his actions, and a 1.5-point rate rise in October, have failed to have much impact.
"This was the very minimum the central bank could deliver given the slide in the rouble. We think further hikes are more likely than not in 2015," said Neil Shearing, chief emerging markets economist at Capital Economics in London. The central bank said it would continue raising its key rate if inflation risks deepen, and used much stronger language than previously in a sign of its growing concern.
It predicted lower economic growth in the next three years than earlier forecast but gave no figure. Its previous forecast was that the economy would stagnate until the end of 2016 but recover slightly in 2017, but since then the Economy Ministry has said the economy will contract by 0.8 percent in 2015.
The bank's rate decision did little to buttress the rouble, which fell below 55 to the dollar for the first time on the Moscow Exchange shortly before the announcement and continued falling afterwards, hitting 55.45 roubles per dollar.
The central bank has been under intense pressure to tighten policy but has also had to weigh the additional burden that higher lending rates put on Russia's sanctions-hit economy.
Many economists now predict Russia's economy will slide into recession next year, as the Western sanctions show no sign of being withdrawn soon and plummeting oil prices are threatening the country's main source of export revenue. Vladimir Kolychev, an economist at VTB Capital in Moscow, said he expected further measures from the central bank, for instance moves to increase foreign-currency liquidity.
"At the moment it's not clear which path the central bank will choose, to provide dollar liquidity via spot (through interventions), or through debt," Kolychev said.
The central bank has spent over $75bn defending the rouble this year, including more than $5bn since it floated the currency a month ago, drawing on reserves which are now around $420bn.
With capital flight expected to soar way beyond $100bn this year, the bank, the government and the Kremlin are fighting battles on many fronts to slow the slide into recession.
Other bank action has included the introduction of new repo and swap instruments to make more foreign currency available to Russian banks and it has tightened rouble liquidity to limit "speculative" attacks on the currency, but there was no mention of any such additional measures in the bank's statement.
The rate rise means the bank has now raised its one-week minimum auction repo rate by a cumulative 500 basis points this year, despite the sharp slowdown in economic growth
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