Russian Central Bank Hikes Rates

The Russian central bank has raised rates to 10.5% from 9.5% in its latest attempt to halt the collapse of the rouble. The currency has been hit by a combination of collapsing oil prices, which the country's economy is heavily dependent on, and Western sanctions over Russia's role in supporting anti-government rebels in Ukraine.

The central bank has tried to use shock tactics before to limited effect. At the end of October it raised rates from 8% to 9.5% in a widely unexpected gamble that higher rates will halt the rouble's slide against the dollar and the euro. Unfortunately, while the economic outlook certainly declined as expected the move failed to prevent the rouble from sliding further as oil prices continued to slump.

As you can see from the chart below, rouble falls against the dollar (orange line) have closely tracked drops in the price of oil (green line):

BloombergRouble vs Brent crude.

Market analysts were forecasting a hike of the central bank's key interest rate of 9.5% by anything from 25 basis points to as much as 250 basis points, according to the Wall Street Journal. That is, people expected anything from 9.75% to 12%.

Trading EconomicsRussian inflation hit 9.1% in November.

Inflation in Russia hit 9.4% last month as sanctions on imports and the collapsing rouble drove up prices in the country - well above the central bank's target of 5.5% for 2014. The Bank of Russia forecasts that inflation may exceed 10% in the first quarter but is expected to decline after that.

The rate of price rises and ongoing falls in the value of the currency has put pressure on the central bank to increase interest rates in order to slow the pace of spending in the economy by encouraging people to save more of their money. However doing so risks worsening the already parlous state of Russia's economy, which is now expected to fall into a recession next year.

After growing at an average pace of around 6.9% between 1999-2008 Russia has struggled to regain its momentum since the Great Recession. According to the Bank of Russia, the annual GDP growth rate in 2014 was 0.6%.

Trading EconomicsRussia GDP growth 2002-2014.