adminWASHINGTON. — Russia raised its main interest rate the most since 1998 to shore up the economy as concerns that President Vladimir Putin will invade Ukraine sent the ruble tumbling and sparked the biggest stock sell-off in five years.
The one-week auction rate, the benchmark introduced in September, was increased temporarily to 7 percent from 5,5 percent, the Bank Rossii said on its website yesterday.
The 150 basis-point move was accompanied by similar increases in other major lending rates.
Putin gained parliamentary approval to send troops into Ukraine last week after Pro-Russian forces took control of the neighbouring country’s Crimea region. European and US leaders have threatened sanctions against Russia, creating risks that economic growth will stall, demand for the country’s assets will dry up and a sell-off in the currency will deepen.
“There is a risk of international backlash against Russia at a time when the economy faces an increasing need for foreign capital inflows,” Gillian Edgeworth, chief economist for emerging Europe, the Middle East and Africa at UniCredit SpA in London, said in a note. “This uncertainty risks a further escalation in domestic capital outflow.”
Economic Isolation
US president Barack Obama warned Putin against violating international law, which “will lead to greater political and economic isolation” for Russia, according to an e-mailed statement from the White House.
Group of Seven leaders are halting preparations for a summit in Russia in June and may impose sanctions if Putin doesn’t withdraw forces from Ukrainian territory to Russia’s naval base in Crimea.
The Micex, Russia’s benchmark stock index, dropped 8,5 percent yesterday afternoon, the biggest intra-day decline in five years. The ruble extended its decline to a record 42,6948 against the central bank’s basket.
Today’s decision “is intended to prevent inflation and financial-stability risks connected with the recent high volatility in the financial markets,” Bank Rossii said. The board will meet March 14 as planned, according to the statement.
It was the biggest increase in a Russian benchmark rate since June 1998, less than two months before Russia defaulted on domestic sovereign bonds and devalued the currency. The refinancing rate used to be the central bank’s main reference.
In February, the regulator signalled it’s prepared to tighten monetary policy if ruble weakness adds to inflation risks, while extending the interest-rate pause to 17 months.
Foreign Reserves
The central bank has been striving to rein in inflation and ease currency swings, while helping support economic growth. Consumer-price growth was 6,1 percent in January from a year earlier, remaining above the central bank’s target of 5 percent for 17 months.
Foreign reserves fell to a three-year low of US$490 billion on February 7, a week after deputy economy minister Andrey Klepach said that capital outflows may reach US$35 billion in the first quarter, more than half of the US$63 billion that left Russia in all of 2013.
The ruble is trading above the last announced level of the central bank’s corridor, raised to 35,40 to 42,40 on February 28, which means that regulator is selling foreign currency and buying rubles without daily limits to slow its depreciation.
Yields on government bonds jumped most after the unexpectedly rate increase aimed at stemming “short-term volatility.”
The yield due February 2027 rose 48 basis points, or 0,48 percentage point, to 8,84 percent, the highest since June 2012 and within 25 points of the record high.
“The escalation of the Ukraine crisis, with reports that Russia may have invaded Crimea, represents a major shock to sentiment towards risky assets,” Benoit Anne, head of emerging-markets strategy at Societe Generale in London, said in a note yesterday.
“We doubt at this stage that this will be enough,” he said of the rate increase. — Bloomberg.
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