Russia’s Central Bank has raised its main interest rate from 10.5 per cent to 17 per cent in the middle of the Moscow night, just five days after the last rate rise and hours after the rouble suffered its worst drop since 1998.
“The decision was driven by the need to limit the risks of dealecvaluation and inflation, which have recently significantly increased,” the central bank said in a statement.Its move followed a day during which the rouble had tumbled more than 10 per cent against the dollar as the implications of the fall in oil prices for the country’s energy-dependent economy triggered a rout across Russian markets.
In the bleakest official forecast yet from Moscow, the Russian central bank warned that the country could see a 4.5 per cent to 4.7 per cent contraction in GDP next year if oil prices remained at $60 a barrel.
Along with the rate rise the bank also announced it would expand its foreign currency repo auctions from $1.5bn to $5bn, in an attempt to provide liquidity to the country’s banks, which have been struggling with a shortage of dollars.
Currency traders and analysts in New York described the central bank’s move as a “last-ditch” effort to stop the rouble’s relentless slide.
“It’s a shock-and-awe approach that has worked in the past with other emerging markets’ central banks, trying to defend their currency and shake short-term speculators out of markets,” said Kathy Lien of BK Asset Management, which specialises in currencies.
“Basically the Russian central bank is telling markets that it is on the other side of this trade and won’t let the rouble completely collapse. They have tried a lot of measures recently and none seemed to have worked. The rate rise should, at least in the short term, help the rouble find a bottom,” she said.
Aggressive rate rises are not uncommon in emerging markets when central banks have to defend their currencies from rapid depreciation. Earlier this year Turkey pushed up its key interest rate from 7.75 per cent to 12 per cent on overnight loans. Brazil’s raised its prime-lending rate to 45 per cent in March 1999 after the real weakened by 40 per cent.
The combination of a sharp drop in the price of oil, western sanctions and paralysing uncertainty over the economic outlook have triggered a collapse in the rouble in the past month. It hit fresh lows of 64.45 against the dollar and 81.35 to the euro on Monday.
So far this year, it has lost half its value against the dollar, making it the world’s worst-performing major currency, ahead of the Ukrainian hryvnia.
Traders said the central bank had intervened several times during Monday trading but had failed to halt the slide in the rouble for more than a few minutes on each occasion.
“There is panic in local markets driven by the inaction of the central bank,” said Benoit Anne, head of emerging markets at Société Générale, earlier in the day. “Russia may not be on the brink of financial crisis but it is close to losing its investment-grade status.”
The sell-off swept across asset classes, with the shares of Sberbank, Russia’s largest bank, dropping 6.3 per cent, and Rosneft, the state oil company, falling 4.4 per cent. In dollar terms, Russia’s Micex equity benchmark has fallen more than 26 per cent so far in December — on track to be the biggest monthly drop since October 2008.
In bond markets, the yield of the government’s international dollar-denominated bond leapt up more than half a percentage point to 7.22 per cent — above the equivalent yields for Rwanda, the Ivory Coast and Peru.
Dubbing it “Red Monday”, Timothy Ash, emerging markets strategist at Standard Bank in London, said the rout was a demonstration of investors’ lack of confidence in the Russian economy. “It is not just about oil, it is about sanctions, geopolitical risk and . . . the lack of policy action by the Russian authorities,” he said.
In Moscow, the currency collapse evoked memories of the economic turmoil of the 1990s, as a few Russian shopkeepers gave up trying to keep pace with the falls in the rouble and returned to the practice of marking prices in “conditional units” — a code for dollars.
The central bank on Monday forecast that capital outflow from Russia would total $120bn in 2015, nearly matching the $134bn estimated to leave the country this year. It also predicted outflows of $75bn in 2016 and $55bn in 2017.They were swiftly brought into line. Alexei Nemeryuk, head of trade and services at the Moscow mayor’s office, told news agency Interfax on Monday that marking prices in anything other than roubles was illegal. “Apparently, retailers are too lazy to rewrite their price tags. But this is a few isolated cases,” he said.
Russian companies remain largely shut out of global capital markets as a result of sanctions imposed by western countries and face a looming credit crunch as they need to refinance their debt. Rosneft, for example, last week raised Rbs625bn from local banks ahead of a foreign bond payment due at the end of the week.
Data from JPMorgan shows that, on average, Russia’s hard-currency corporate bond yields have increased from 8 per cent at the start of the month to about 11 per cent.
“The situation in Ukraine and resulting sanctions have led investors to question how exactly Russian corporates will be able to refinance their debts without access to their usual investor base,” said Yannik Zufferey, head of the Swiss fixed-income team at Lombard Odier Investment Managers.