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Russia hikes up key interest rate as ruble falls

December 16, 2014

Russia's central bank has dramatically raised its key interest rate in an effort to prevent the collapse of the ruble. The currency is under pressure as oil prices slide and Western sanctions over Ukraine begin to bite.

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Symbolbild Russland Wirtschaft Rezession Rubel Sanktionen
Image: Vasily Maximov/AFP/Getty Images

The central bank raised its key interest rate from 10.5 percent early on Tuesday to 17 percent, in an emergency move to stem the ruble's decline.

The action on Tuesday followed a bad day for the ruble, which on Monday dropped significantly in value: the price of a dollar rising to 65 rubles, compared with 55 rubles earlier in the day.

A more modest hike in the key interest rate had already been tried last Thursday, the rate rising from 9.5 to 10.5 percent. The magnitude of the latest rise was said to reflect fears of a run on the banks, with mass withdrawals that could threaten to deepen Russia's economic woes.

The Bank of Russia also decided last week that it would let the value of the ruble float freely on markets earlier than originally planned.

The ruble's value has sunk by roughly 50 percent since January, hit by a sharp fall in worldwide oil prices.

Barrel price tumbles

Russia, the economy of which is highly dependent on petroleum revenue, has suffered as the average price of a barrel of oil has dropped below $56 from a summer high of $107. Moscow recently downgraded its growth forecast, predicting the economy was likely to sink into a recession.

Western sanctions - imposed in response to Moscow's annexation of Crimea and alleged support for separatists in Ukraine's east - have also had an impact.

The rise in interest could have a downside for Russia. A decline in oil revenue means Moscow is likely to have to borrow more money, now at higher rates, while an increase in the cost of imports would stoke inflationary pressure.

rc/lw (AFP, AP, dpa, Reuters)