‘Incredible currency collapse’ of Russian ruble despite bank rate hike

World Today

Signs advertising currencies light next to the exchange office in Moscow, Russia, Tuesday, Dec. 16, 2014. After a massive overnight rate hike by Russia’s Central Bank, the ruble staged a two-hour rally Tuesday morning before rolling back to new historic lows. The surprise Central Bank decision to raise the rate to 17 percent from 10.5 percent came in the early hours on Tuesday in a desperate attempt to prop up the troubled currency. It’s the biggest interest rate hike since 1998, the year when Russia defaulted on its sovereign bonds.(AP Photo / Alexander Zemlianichenko)

AP — The Russian ruble came under intense selling pressure Tuesday, falling at one point by a catastrophic 20 percent to a new historic low despite a massive pre-dawn interest rate hike from Russia’s Central Bank. Russian officials were clearly rattled even though state television urged citizens not to panic.

“The situation is critical,” Deputy Central Bank chairman Sergei Shvetsov was quoted by Russian news agencies as saying. “We could not have imagined what is happening in our worst dreams.”

The Central Bank’s surprise decision to raise the interest rate by a whopping 6.5 percentage points to 17 percent from 10.5 percent in the middle of the night Tuesday appeared to be a desperate attempt to prop up the troubled currency. The ruble has fallen sharply in recent weeks and is down more than 60 percent since January, due to sinking oil prices as well as the impact of Western sanctions imposed over Russia’s involvement in Ukraine’s crisis.

The ruble’s collapse spurred ordinary Russians to rush out and buy imported products like fridges and cars, as inflation is making those items more expensive by the day. It’s also likely to heap pressure on President Vladimir Putin, despite his wide support.

The ruble traded at 72 per U.S. dollar late Tuesday afternoon — a modest improvement from earlier, when it hit 78.5 to the dollar.

Timothy Ash at London-based Standard Bank described the ruble’s fall as “the most incredible currency collapse I think I have ever seen in the 17 years in the market, and 26 years covering Russia.”

“There is now a huge credibility gap for Russian policy makers in the eyes of the market,” he said, adding the decline was all the more astonishing given Russia’s solid foreign currency reserves and the fact that it runs a budget surplus.

Oksana Dmitriyeva, deputy chief of the Fair Russia faction at the Russian Duma, blamed the collapse of the ruble on the Central Bank’s “chaotic and unprofessional” policies.

“The government has no strategy,” she said, adding that whether the ruble would withstand the decline “depends on official policies.”

The Central Bank’s interest rate move Tuesday aimed to encourage currency traders to hold onto their rubles — doing so gives them potentially big returns, certainly in comparison to many other currencies, such as the dollar, where the interest rate returns are near zero percent.

Article by The Associated Press