I commented earlier today, that you do not defend a currency by foolishly wasting foreign reserves. The Russian central bank came to the same conclusion.
In an emergency middle-of-the-night central bank action, Moscow Lifts Interest Rates to 17%.
Russia has lifted its key interest rate to 17 per cent, hours after the rouble suffered its worst drop since 1998.
“The decision was driven by the need to limit the risks of devaluation and inflation, which have recently significantly increased,” the central bank said in a statement.
The move in the middle of the Moscow night followed a day during which the rouble had tumbled more than 10 per cent as the implications of the fall in oil prices for the country’s energy-dependent economy triggered a rout across Russian markets.
In the bleakest official forecast yet from Moscow, the Russian central bank warned that the country could see a 4.5 per cent to 4.7 per cent contraction in GDP next year if oil prices remained at $60 a barrel.
So far this year, it has lost half its value against the dollar, making it the world’s worst-performing major currency, ahead of the Ukrainian hryvnia.
Traders said the central bank had intervened several times during Monday trading but had failed to halt the slide in the rouble for more than a few minutes on each occasion.
The central bank on Monday forecast that capital outflow from Russia would total $120bn in 2015, nearly matching the $134bn estimated to leave the country this year. It also predicted outflows of $75bn in 2016 and $55bn in 2017.
US$ vs. Ruble
At the end of 2013 the Ruble closed at 33.20-per-US$. It touched a low of 66.84-per-US$, a decline of slightly over 50% before settling today at 65.60, just under a 50% decline for the year.
Russia Serious About Halting Ruble Slide
That massive 6.5 percentage point hike may or may not stop capital flight and currency depreciation, but it does show Russia is very serious about the effort. 6.5 percentage points is genuine bazooka action.
Huge Recession Baked in Cake
Even if the hike stops the currency slide, it will come at a cost. A massive Russian recession is baked in the cake.
That recession will spill over into Eastern Europe including the eurozone.
Mike “Mish” Shedlock