An emergency meeting of the Bank of Russia's board of directors Tuesday called in the wake of a run on the ruble hiked the bank's key interest rate from 8.5% to 12%. File photo by Sergei Ilnitsky/EPA-EFE
Aug. 15 (UPI) -- Russia's central bank hiked its main interest rate by more than 40% on Tuesday in a bid to tame surging price inflation and 24 hours after the ruble plunged to a 16-month low, severely denting the currency's purchasing power.
The 350 basis point rise to 12% by an unscheduled board of directors meeting was aimed at "limiting price stability risks" after annual inflation in July jumped to 4.4% and averaged 7.6% over the past three months, the Bank of Russia said in a news release.
The measure for core inflation -- which strips out prices of more volatile items such as fuel and food -- rose to 7.1%.
The bank said strong domestic demand growth in excess of the economy's output capacity had exacerbated underlying inflationary pressure and helped push down the value of the ruble by boosting demand for imports.
"Consequently, the pass-through of the ruble's depreciation to prices is gaining momentum and inflation expectations are on the rise," the bank added, warning that if the speed at which prices were climbing maintained its current level there was a "substantial" risk inflation would rise further from the 4% target.
"The Bank of Russia's decision is aimed at shaping monetary conditions and overall domestic demand dynamics necessary to bring inflation back to 4% in 2024 and stabilize it close to 4% further on," the bank added.
The ruble responded positively to the announcement, rebounding to 98.61 to the U.S. dollar as of 7:40 a.m. EDT after hitting a low of more than 102 on Monday following a public spat between the bank and President Vladimir Putin's chief economic advisor.
Finance Ministry planning head Maxim Oreshkin blamed the ruble's weakness on the central bank's "loose monetary policy" saying it had all the necessary tools to rectify the situation while the BOR blamed an 85% contraction of the country's current account surplus in the year-to-date, compared with the same period in 2022.
Going forward, the bank said its interest rate decisions would take account of actual and expected inflation relative to the 4% target and structural rebalancing of the economy, risks from domestic and external conditions and how financial markets respond.
The bank said its modeling showed the new, tighter monetary policy stance would see annual inflation return to 4% in 2024.
The board of directors' next scheduled meeting is due Sept. 15.
