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Dec 16, 2014 2:17 AM

Ruble rallies on Central Bank rate hike

The Associated Press

MOSCOW (AP) A massive overnight rate hike by Russia's Central Bank pushed the ruble 5 percent higher in early trading on Tuesday, reversing the currency's fall but spelling troubles for the economy ahead.

The ruble traded at 61 per dollar less than an hour into the trading after losing about 10 percent on Monday in the biggest fall since the 1998 economic meltdown.

The surprise Central Bank announcement to hike the rate to 17 percent from 10.5 percent came in the early hours on Tuesday in a desperate move to prop up the trouble currency. It's the biggest interest rate hike since 1998, a year when Russia defaulted on its sovereign bonds.

The move was meant to make it expensive for currency traders to buy rubles and sell them on the market.

The ruble has lost half of its value this year and the decline intensified in the past months by Western sanctions and plunging oil prices.

"With these steps, the Central Bank is looking to bring stability back to the (foreign exchange) market, which has been behaving irrationally over the last few weeks," Moscow-based investment bank Sberbank-CIB said in a morning note. "This state of affairs required extraordinary measures from the Central Bank and such measures have now been taken."

The bank, however, added that this step alone is unlikely to reverse the collapse of the ruble, saying that "the longer term stabilization will depend on the consistency of the regulator's (the bank's) actions and its degree of commitment."

Russian stocks were moderately declining Tuesday morning with the MICEX benchmark 1.5 percent lower, reflecting the rate hike's pressure on businesses.

A decline in the price of oil has weighed heavily on the Russian economy as Russia relies heavily on oil revenue and lacks the diversification to withstand severe economic downturns. The average price of a barrel of oil has dropped below $56 from a summer high of $107. The government recently downgraded its forecast for next year, predicting that the economy will sink into recession.

The central bank has gradually raised the rate from 5.5 percent early this year. Last Thursday, it tried unsuccessfully to stem the ruble's slide by boosting its key rate by 1 percentage point to 10.5 percent.

The rate increase, although it can help stabilize the ruble, could spell serious economic troubles ahead, making it more expensive for companies to borrow funds.

Alexei Kudrin, Russia's finance minister in 2000-2011, said on Twitter following the rate hike that "the fall of the ruble and the stock market is not just a reaction to low oil prices and the sanctions but also (a show of) distrust to economic policies of the government."

Kudrin added that the rate hike "should be followed by government measures to raise investor confidence in the Russian economy." He did not say what steps he advocated.


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