Russia’s central bank on Monday unexpectedly hiked its main interest rate by the most since 1998 after the ruble hit an all-time low, as investors grew fearful over the consequences of military action in Ukraine.
Bank Rossii raised the key lending rate -- the one-week repurchasing agreement -- to 7 percent from 5.5 percent. The decision “is meant to avoid emerging risks to inflation and financial stability associated with the recently seen increased volatility on the financial markets,” Bank Rossii said in a statement. The central bank described the move as "temporary." The board will meet March 14 as planned, according to the statement.
"The move by the central bank underlines that Russia’s economy is not quite as immune to external shocks as many seem to assume," Neil Shearing, chief emerging markets economist at Capital Economics, said in a note.
"Admittedly, the current account is in surplus and foreign exchange reserves are substantial, currently $499 billion," Shearing said. "But by the same token, the current account surplus is diminishing quickly and, more importantly, was outweighed by capital outflows last year."
Putin gained parliamentary approval to send troops into Ukraine over the weekend, triggering an immediate response by Ukraine, which accused its neighbor of declaring war. European and U.S. leaders have threatened sanctions against Russia. This, combined with the rate hike, may put pressure on the already flagging economy. In 2013, Russia’s economic growth slowed to 1.3 percent, its weakest pace since Putin came to power in 2000.
Rising tensions have scared investors out of Russian assets alike, fueling a rush to safe-haven currencies.
“The market reaction suggests uncertainty but not fear that the crisis will spread much more widely,” said Kit Juckes, currency strategist at Societe Generale, in a note. He added in his note that the yen is so far the winner, while the ruble is among the losers.
“These trends are likely to continue for now, despite the 150 basis points rate hike announced this morning by Bank Rossii,” Juckes said. “Russia is unlikely to back down in its support of the regional government in Crimea.”