Growth in the Interest Rate will Hardly Result in Appreciation of the Ruble

On October 31, 2014, at the regular meeting of the Board of Directors of the Central Bank of Russia a decision was taken on substantial raising of the key interest rate to 9.5% annually (growth of 1.5 p.p.).

The above decision was justified by dramatic changes in the external situation, particularly, a considerable drop in oil prices and toughening of sanctions against Russian companies which situation speeds up inflationary processes and depreciation of the national currency. In future, with adaptation of the economy to trade restrictions, fading of the effect of a transfer of the ruble devaluation into prices and improvement of the foreign economic situation the Central Bank of Russia plans to ease its monetary policy.


In a situation of a dramatic decrease in international reserves and the regulator's switchover as early as 2015 to the regime of the floating exchange rate and inflation targeting, the decision on raising of the key interest rate is quite an expected one. Taking into account the fact that the rate of inflation is highly likely to exceed the level of 8%, setting of the real key interest rate above the zero value may become an important factor behind slowdown of growth rates of prices. It is to be noted that such a dramatic toughening of the monetary policy in the short-term prospect may result in higher risks of a credit crunch and further slowdown of growth rates of the Russian economy.


It is believed that even the above-mentioned growth in interest rates can hardly slow down the rate of the ruble depreciation which yields market players -- who buy foreign currency -- an income of over 1% a day. It is to be noted that to support the rate at the set level the Central Bank of Russia has to provide credit institutions with new ruble liquidity which immediately appears on the foreign exchange market. In such conditions, stabilization of the situation on the foreign exchange market (with the same macroeconomic and political factors prevailing) could only be achieved by means of squeezing of excessive reserves of commercial banks along with growth in interest rates on the inter-bank lending market.


Pavel Trunin, PhD (Economics), Director of the Center for Macroeconomics and Finance
Alexandra Bozhechkova, Researcher