The Russian central bank unexpectedly raised their benchmark rate from seven percent to 7.5 percent amid higher inflation, a sinking ruble and capital flight as tensions rise between Ukraine. The ongoing conflict, and resulting sanctions, is putting pressure on the weak Russian economy which could sink into a recession.
The ruble is trading near all-time lows, losing more than eight percent against the greenback, and inflation has been above the central bank’s target for almost two years. “The probability of inflation exceeding the 5 percent target at the end of 2014 has increased substantially,” said a central bank issued statement.
“Inflation is way above target, and the central bank cites this as the main reason for the hike. We expect this move to bring only a temporary relief to the ruble market. The rate hike is powerless to stem capital outflows which are fueled by the high geopolitical risks,” said Tatiana Orlova, a senior economist at Royal Bank of Scotland Group Plc.
Standard & Poor’s cut Russia’s sovereign credit rating to BBB-, the lowest investment grade. In a statement, the S&P indicated that the geopolitical tension will likely added to the capital outflows and further weaken growth expansion. Russian yields rose to a six-week high. Finance Minister Anton Siluanov said “capital outflows reduce the possibility for investment growth in the economy and create risks of an unbalanced budget.”