Late last night the Russian central bank (CBR) in a surprise move hiked its key policy rate by 650bp to 17.0% from 10.5%. So far the CBR has been holding back in terms of ‘emergency hikes’ and as such the hike marks a change in policy stance.

The hike comes after the RUB on Monday saw is biggest one-day decline since the Russian crisis in 1998 and in our view it is a clear signal that the CBR now thinks that the sell-off is threatening financial stability. The CBR is likely also reacting to mounting political pressure to act to curb the RUB sell-off.

The CBR is stuck between a rock and a hard place. On the one hand there are – in addition to the political pressure – worries about rising inflation on the back of the RUB sell-off and mounting funding problems for Russian corporations’ foreign currency loans. On the other hand, aggressive monetary tightening, which we are now seeing, is very likely to have seriously negative implications for growth and might also increase financial distress as consumers and corporations are seeing sharply rising funding costs.

In our view the CBR will have a hard time stabilising the RUB as long as the drop in the oil price continues, so it might turn out that yesterday’s aggressive rate hike will not be enough to stabilise the RUB.

Furthermore, we would argue that the aggressive rate hike marks the first major change of course from the CBR after the recent announcement that it would allow the RUB to float freely. The rate hike shows that the CBR’s commitment to the float has limits. It should also be noted that the rate hike is likely to fuel speculation that the Russian authorities could introduce capital and currency controls if the RUB sell-off continues. We would at this point not rule out such actions, even though we want to stress that the CBR – rightly so – to this point has been against such actions, but clearly the political pressure is mounting.

Overall, the continued drop in the oil price and hence in the RUB, combined with the now very significant monetary tightening, is likely to deepen the crisis in the Russian economy. The country has effectively entered recession and there are no signs of any near-term relief for the Russian economy, which is likely to fall deeper into recession in the coming quarters.

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD consolidates weekly gains above 1.1150

EUR/USD consolidates weekly gains above 1.1150

EUR/USD moves up and down in a narrow channel slightly above 1.1150 on Friday. In the absence of high-tier macroeconomic data releases, comments from central bank officials and the risk mood could drive the pair's action heading into the weekend.

EUR/USD News
GBP/USD stabilizes near 1.3300, looks to post strong weekly gains

GBP/USD stabilizes near 1.3300, looks to post strong weekly gains

GBP/USD trades modestly higher on the day near 1.3300, supported by the upbeat UK Retail Sales data for August. The pair remains on track to end the week, which featured Fed and BoE policy decisions, with strong gains. 

GBP/USD News
Gold extends rally to new record-high above $2,610

Gold extends rally to new record-high above $2,610

Gold (XAU/USD) preserves its bullish momentum and trades at a new all-time high above $2,610 on Friday. Heightened expectations that global central banks will follow the Fed in easing policy and slashing rates lift XAU/USD.

Gold News
Week ahead – SNB to cut again, RBA to stand pat, PCE inflation also on tap

Week ahead – SNB to cut again, RBA to stand pat, PCE inflation also on tap

SNB is expected to ease for third time; might cut by 50bps. RBA to hold rates but could turn less hawkish as CPI falls. After inaugural Fed cut, attention turns to PCE inflation.

Read more
Bank of Japan set to keep rates on hold after July’s hike shocked markets

Bank of Japan set to keep rates on hold after July’s hike shocked markets

The Bank of Japan is expected to keep its short-term interest rate target between 0.15% and 0.25% on Friday, following the conclusion of its two-day monetary policy review. The decision is set to be announced during the early Asian session. 

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures