Russia hikes interest rates to stop ruble's fall

Russia's central bank hiked its key interest rate to 12% on Tuesday.

The 3.5 percentage point rise represents a bid to fight high inflation and the sharp depreciation of the nation's currency against the US dollar and the euro in recent weeks. 

The Bank of Russia announced its decision after holding an extraordinary meeting, which came after the ruble plummeted below a psychologically important mark of 100 rubles for $1 (€0.92).

The bank has blamed declining foreign trade for the currency's weakness, and attributed higher inflation to heavier government expenditure and labor shortages caused by the costly Ukraine war effort.

"Inflationary pressure is building up," the bank said in a statement on Tuesday, adding that demand has exceeded the country's ability to expand economic output. "Consequently, the pass-through of the ruble's depreciation to prices is gaining momentum and inflation expectations are on the rise."

What did Kremlin say about the situation?

The rate move came after the Kremlin publicly called for tighter monetary policy.

President Vladimir Putin's economic adviser Maxim Oreshkin on Monday rebuked the central bank, blaming what he called its soft monetary policy on the weakening ruble.

He said that the monetary authority has "all the tools necessary" to stabilize the situation and that he expects normalization shortly.

The bank last made an emergency rate hike in late February 2022, when it raised benchmark rates to 20%.

The move was aimed at supporting the Russian currency and dealing with the monetary fallout of Moscow's invasion of Ukraine. 

The bank then steadily lowered the cost of borrowing to 7.5% as strong inflation pressure eased in the second half of 2022.

The central bank's next meeting on interest rates is planned for September 15.

sri/rt (AP, AFP, Reuters)