The Interest Rate Should be Left High Maximum for a Month

On March 3, 2014, the Central Bank of Russia raised the key interest rate from 5.5% to 7% per annum in order to protect the national currency.

It is to be noted that only the Argentinean peso is in a worse situation as compared to the Russian ruble; all the attacks on national currencies of developing countries were less painful.  The above points to the fact that Russia has rather week financial markets and the banking sector.

Certainly, depreciation of the national currency was heated up by the political situation. If there was no political shock, there would be stabilization in the near future.   So, the Central Bank demonstrated a rather reserved attitude to the national currency and started to react only when the market had collapsed.  

Growth in the interest rate will result in appreciation of all the ruble instruments and subsequent growth in interest rates on loans and deposits. The ruble will appreciate considerably if the higher interest rate is maintained for at least two–three weeks.

On the other side, growth in the interest rate may have negative consequences as due to appreciation of the cost of loans economic growth may suffer. So, it is expedient to maintain a high interest rate maximum for a month, otherwise, it may have an adverse effect on economic growth.

Alexei Vedev, Director of the Structural Research Center