(Bloomberg) -- A recent slump in the ruble is ramping up pressure on the Bank of Russia to hike its key rate — potentially by the most since the start of the war on Ukraine.
The currency has weakened more than 9% against the dollar and 6% against yuan since Nov. 21, when the US sanctioned some 50 Russian banks, according to central bank data. That’s likely to exacerbate inflation, which the Bank of Russia has been struggling to curtail by raising interest rates to a record high.
The central bank has said it’s ready to further raise the cost of borrowing — currently at 21% — to whatever level is needed to bring inflation back to the target level of 4% next year. That may mean the next step will be to hike to 25%, according to Bloomberg Economics estimates.
“The central bank faces a dilemma: should it hike interest rates further, even though that lifts the risk of recession, or just accept higher inflationary pressure,” said Alex Isakov, BE’s Russia economist. “Policymakers will probably opt for the former.”
Demand for foreign currency has surged on the local market amid concerns that new restrictions will significantly limit inflows. Officials have been at pains to downplay the impact of a weaker ruble, stressing in particular that it’s a boon for exporters. But with inflation running at more than twice the central bank’s target, the currency’s collapse may force rate-setters to act despite already painful lending conditions.
“There are many seasonal factors” at play, as well as budget payments and oil prices, President Vladimir Putin told reporters during a news conference in Astana, Kazakhstan, on Thursday. “The situation is under control, and there are certainly no grounds for panic.”
Putin also said that other “instruments” could be used to fight inflation beyond raising the key rate, but that ultimately it was the central bank’s decision on how best to curtail price growth.
Since the beginning of the year, the ruble has lost more than 21% versus the greenback, making it among the worst performing emerging-market currencies. The Bank of Russia has used interbank transactions to calculate the rate since June, when the US sanctioned the Moscow Exchange — which immediately halted dollar and euro trading.
Russian exporters and importers have been facing difficulties with international payments since the end of 2023, when the US threatened secondary penalties against financial institutions working with Russia. New rounds of restrictions may complicate foreign trade transactions even more and reduce incentives for exporters to bring foreign-exchange liquidity into Russia.
In response, the Bank of Russia announced late Wednesday that it was halting purchases of foreign currency on the domestic market until the end of 2024.
This may ease the current FX shortage, but it won’t be enough to trigger a serious rebound in the ruble, said Evgeny Loktyukhov of Promsvyazbank.
Russian inflation accelerated for the third straight week despite the October rate hike. The bank’s official forecast, calculated before the recent ruble weakening, suggested that price growth will reach 8%-8.5% at the end of 2024. Kirill Tremasov, an adviser to the Bank of Russia, acknowledged that inflation risked exceeding that outlook.
Iskander Lutsko, the chief investment strategist at ITI Capital Ltd said the weakening ruble alone is not enough for the central bank to take drastic steps in December. More time needs to pass since the last rate increase for it to have had a cooling effect on inflation, he said.
Natalia Milchakova, an analyst at Freedom Finance Global in Kazakhstan, disagrees, noting that weekly inflation will continue to accelerate amid growing demand ahead of the New Year holidays.
“A key rate hike in December was inevitable anyway, but now it should be at least twice as significant as the one percentage-point move previously expected,” Milchakova said.
The Bank of Russia estimates that the weakening ruble adds 0.5-0.6 percentage points to inflation. However, Russia’s second largest bank, VTB Bank PJSC, estimates the effect is five times more significant and sees the currency’s collapse adding inflationary pressure beyond what policymakers expect.
Recent events may “lead to a revision of the future key rate trajectory,” said the first deputy chairman at VTB, Dmitriy Pianov, according to the Interfax news service. “This is a strong inflationary factor.”
(Updates with new numbers in second and eighth paragraphs and first chart.)
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