Bank of Russia raises base rate in a swift move to cope with weakening of ruble
During an urgent meeting, the Bank of Russia decided to raise the base rate by 3.5 percentage points to 12%, according to the regulator’s website.
«This decision was made in order to lower risks for price stability,» the regulator said in a statement.
The Bank of Russia reports high inflationary pressure. For instance, in August the price surge was 4.4% while the target level was 4%. The inflation has accelerated to 7.6% on an annual basis with an adjustment for seasonality.
«The sharp increase of domestic demand is increasing the inflationary pressure and affecting the ruble’s exchange rate dynamic through high demand for imports. As a result, the weakening of the ruble affects prices and drives up inflation expectations,» the Bank of Russia said.
The regulator’s decision to raise the base rate followed the ongoing weakening of the ruble. The exchange rate of the Russian currency has been decreasing toward the US dollar and euro for the past several months. On August 14, the dollar hit the 100 rubles bar on the Moscow Exchange, a very important point in terms of psychology for the Russian market. However, after the Bank of Russia announced its urgent meeting on the base rate issue, the ruble’s exchange rate has strengthened and currently is trading for 96.9 rubles per dollar.
On that day, Maxim Oreshkin, aide to President Putin and former minister for economic development, said that the timid monetary policy by the Bank of Russia is the only reason for the collapse of the ruble’s exchange rate.
The Bank of Russia used the same trick by sharply raising the base rate right after the West imposed sanctions against Russia due to its invasion of Ukraine. At the time, the rate was raised from 9.5% to 20%. However, as the ruble’s exchange rate strengthened because of a decline in imports, the regulator softened its monetary policy. Over the period from October 2022 to July 2023, the base rate in Russia was 7.5%. In July, the Bank of Russia raised it to 8.5%.
