Russia raises interest rates to 10.5%

Image source, AFP
Image caption,
A weak rouble has kept inflation high

Russia's central bank has raised its key interest rate by one percentage point to 10.5% as it steps up the fight to tackle inflation.

It comes just six weeks after it raised the rate to 9.5% from 8%.

The bank's official website added that it would continue raising the rate "in case of further aggravation of inflation risks".

In its monthly economic update the Bank of Russia also said that, as of 8 December, annual inflation was 9.4%.

A weak rouble and a ban on western food imports has kept inflation high.


"The hope is that [interest rate rises] will cut consumption and stop prices rising so fast," said the BBC's Moscow correspondent Steven Rosenberg."

But there's a downside to that; raising interest rates slows economic growth - and that's not good, with Russia on the brink of recession.

"As for the rouble, it has continued to slide and has fallen to a new low against the dollar."

The rouble hit new lows after the rates decision, and was trading at 55.45 against the dollar and 68.98 against the euro not long after the bank's announcement.

The rate hike comes a day after the bank admitted it had intervened to support the rouble in foreign currency markets last week, spending a total of $4.53bn (£2.9bn).

It has spent more than $70bn supporting the rouble since the start of the year.

The Bank of Russia also said on Thursday that GDP growth would be weak during 2015-16, as consumer activity weakened.

Analysis: Andrew Walker, BBC economics correspondent

There were no easy options for the Russian central bank. Rising inflation and weakening economic activity call for opposite moves in interest rates.

The bank chose to focus on the inflation problem and used the standard response from the central bankers' toolkit.

The sharpness of the dilemma has a lot to do with sanctions. The west's economic response to the conflict in Ukraine has aggravated both inflation and the economic weakness.

The impact on inflation is through the value of the Russian currency. It has been undermined by nervous Russians and others getting their money out due to fear of the impact of sanctions. The precipitous fall in the Rouble's value in turn pushes up the price of imported goods.

If the west wanted evidence that sanctions are making a difference, it's plain to see in the conflicting pressures facing Russia's central bank.

Indian deal

The World Bank has previously warned that the Russian economy will shrink by at least 0.7% in 2015 if oil prices do not recover.

The drop in the price of oil has also hurt the Russian economy.

The World Bank's estimate is based on a scenario of crude prices averaging at $78 in 2015.

But if oil prices fell to $70 on average, Russia's output would shrink by 1.5%, it said.

In late morning trade, North Sea Brent crude rose 63 cents to $64.87, up from Wednesday's low of $63.56 - the weakest in five years. Meanwhile, US crude, which also hit a five-year low on Wednesday, rose 48 cents to $61.42.

Also on Thursday, Russia's top crude oil producer Rosneft said it had reached a preliminary agreement to supply India's Essar Group with 10 million tonnes of oil over a 10-year period.