CBR Drastically Raises Key Rate to 9.5%: USDRUB Respects Resistance

CBR Drastically Raises Key Rate to 9.5%: USDRUB Respects Resistance

Talking Points:

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  CBR raises key rate to 9.5%
  


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  Rising inflation and depreciating ruble cited as reasons for rate increase
  


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  USD/RUB closes the week under resistance
  

To mitigate the effects of external shocks on Russia’s income, output and currency The CBR sharply raised interest rates today by 150 bps. The larger than expected move follows a series of sanctions and counter sanctions, that when combined with falling oil prices derailed consumer confidence and destabilized the ruble. The drasticchange however is expected to restore macroeconomic stability through containing the price level and stabilizing the ruble.

Since entering Crimea in February, the Ruble has depreciated nearly 28% against the dollar while inflation has grown rapidly reaching 8.4% as of October 27th. Total impact on CPI for the year is projected to be 2.5 percentage points driven equally by the effects from trade restrictions (1.3) and ruble depreciation (1.2). With USoil prices 26 % off their June highs, exports expected to contract 1.2% this year, and a series of FX interventions doing little to defend the ruble, the CBR deemed it necessary to raise interest rates to 9.5%.

While the tighter policy yields downside risk, the positive net externalities are expected to be greater. While fixed capital investments may contract due to higher borrowing costs, an increased propensity to save is expected to create wealth effects. Furthermore, as real wages decline more rapidly demand will fall and place downward pressure on the price level. In addition to October’s repurchase agreement a higher interest rate will likely aide in stabilizing the ruble without further depleting international reserves.

USD/RUB 8 Hour Chart

Chart Created by Walker England Using MarketScope2.0

CBR Drastically Raises Key Rate to 9.5%: USDRUB Respects Resistance