Russia Hikes Interest Rates to 17% to Save Ruble

Interesting new strategy to preserve the value of the ruble:



Interest Rate Raised to 17% in Russia

Quote:

Russia’s government is in the middle of an all-out fight to preserve the value of the ruble in the face of plummeting oil prices and Western sanctions over the Ukraine crisis. In the boldest move yet to stanch the bleeding, the Central Bank of Russia announced a stunning interest rate increase in the middle of the night. Its main deposit rate is now 17 percent, up from 10.5 percent when Russian banks closed for business on Monday. The rate increase, one of the largest ever announced by the central bank, echoes the drastic measures taken during the 1998 crisis when Russia defaulted on its debt and devalued the ruble. The question is whether the move — announced on the central bank’s website at 1 a.m. in Russia — will appease the markets. If it doesn’t, investors may view the rate increase as a sign of increasing disarray. Some economists are concerned that Russia is now stuck in the quagmire of stagflation, or high inflation and low growth. The government expects inflation of 10 percent or more by the end of this year and for the country to fall into a recession next year.

Will it work?



If "stagflation" is the problem, this move appears to be similar to the one used by Paul Volcker in the 1980s to curb inflation in the United States. It did work, although it also caused a recession, but one that didn't have long-lasting after-effects.



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Quote:

The Federal Reserve board led by Volcker is widely credited with ending the United States' stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was lowered to 3.2% by 1983.[14] The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well. Thus, the unemployment rate became up over 10%. The economy was restored since the tight-money policy was over in 1982. According to William Silber [15] "His policy of preemptive restraint during the economic upturn after 1983 increased real interest rates and pushed Congress and the president to adopt a plan [the 1985 Gramm-Rudman-Hollings bill] to balance the budget. The combination of sound monetary and fiscal integrity sustained the goal of price stability." . . . Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building.[18]

Any debtors with adjustable interest rate loans are not going to like paying 17% interest, but it could attract investors looking for high yields if they think the premium is worth the risk.