Russia Cuts Benchmark Rate

Market Trends - 13/03/2015

After raising interest rates in spectacular fashion in response to soaring inflation rates, the Russian Central Bank moved to drop rates 100 basis points today to 14.00% as economic conditions improve.  Inflation was a key concern that led to the dramatic hike in rates after the West levied dramatic sanctions against the Russian Government in response to actions in Ukraine.  This led to a massive drop in the Ruble which saw inflation surge even higher as the Central Bank struggled to contain the losses in the Ruble.  Instead of risking foreign currency reserves to prop up the falling value of the Ruble, the Central Bank used monetary policy as a tool to offset the selling pressure without having to sacrifice reserves.  However, monetary policy has not been able to completely reverse the problems facing the outlook with Russia projected to enter recession for the first time in 6 years.  As oil prices tick lower, pressure is mounting on an economy heavily dependent on oil and gas revenues to keep government coffers filled.

The Ruble has not given up further ground thanks to the actions of the Russian Central Bank but they have not yet managed to tackle inflation which climbed to 16.70% in February from a year earlier.  The ban on food imports from nations participating in the sanctions will likely keep inflation high in the near-term.  Although forecast to subside over time as Russians find alternatives to imported products, inflation is problematic despite comments from Central Bank highlighting the transitory nature of the factors pushing the measure higher.  Besides the Ruble drop eroding purchasing power, rapid inflation has the ability to stoke popular dissent against Government policies as financial conditions trump political considerations.  USDRUB has continued to retreat from all-time record highs, but any shift in tensions or outbreak of war could send the Ruble tumbling once more as investors lose confidence.   

 

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