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Russian Rouble Sinks: Russia Hikes Interest Rates to 17.5%

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russian crisis, economy, rouble, credit markets, us economy, world economyThe rouble plunged to 80 to a dollar for the first time as investors believe that the government in Russia would introduce capital controls as the biggest interest rate hike in 16 years was unable to stem the fall in the currency. The rouble sank by close to 19 percent on the back of news that the interest rates in Russia were hiked from 10.5% to 17% overnight. This is the biggest drop in the rouble since the 1998 crash when the Russian economy had defaulted on its local debt obligations.  The Russian rouble erased all of its 11 percent gains in the early morning session post the surprise rate hike decision from the Bank of Russia. Ten year bond yields jumped by a record 317 basis points to 16.4 percent.

Many analysts on the street believe that the Russian central bank might resort to capital controls as the economy seems to be running out of options as the oil price slump continues to hurt the economy. It is important to state that the Russian rouble has plunged by close to 58 percent this year even after an increase in interest rates and also after interventions of close to $80 billion. The Russian government would be holding an emergency meeting today to discuss the financial crisis that the economy finds itself under. The Russian equities index plunged to closet o 5 and a half year lows in todays’ trading session.

The boost in Russian borrowing costs after the interest rate hike was announced overnight was the biggest since rates went past 100 percent since 1998. Many believe the stringent sanctions on Russia post its incursion into Ukraine are the main factors for the sudden fall in economic sentiment in the economy. The central bank is walking a tight-rope as it tries to juggle past a recession and also try to cut inflation which is currently nearing the 9 percent mark.

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