Monday, 3 March 2014

Russia Unexpectedly Raises Rate as Ukraine Crisis Weakens Ruble

  Mar 2, 2014 11:50 PM PT 

Photographer: Andrey Rudakov/Bloomberg
A Russian national flag flies above the headquarters of Bank Rossii, Russia's central bank, in Moscow.
Russia unexpectedly raised its key interest rate 150 basis points as the threat of President Vladimir Putin invading Ukraine prompted the biggest stock-market sell-off in five years and the ruble slumped.
The one-week auction rate, the benchmark introduced in September, was increased temporarily to 7 percent from 5.5 percent, the Bank Rossii said on its website today. It had been left unchanged since August 2012. The board will meet again March 14.
Russia’s monetary authority moved to shore up Russian assets after the country took control of Ukraine’s Crimea region and Putin gained his parliament’s approval to send troops into Ukraine. The threat of Western sanctions against the country risks drying up demand for the country’s assets and deepen a selloff in the currency.
“The escalation of the Ukraine crisis, with reports that Russia may have invaded Crimea, represents a major shock to sentiment towards risky assets,” Benoit Anne, head of emerging-markets strategy at Societe Generale SA in London, said in a note today. “We doubt at this stage that this will be enough,” he said of the rate increase.
The Micex (INDEXCF), Russia’s benchmark stock index, dropped 8.9 percent as of 11:49 a.m. in Moscow, the biggest intraday decline in five years. The ruble weakened to a record low of 42.6466 against the central bank’s basket. The yield on Russian government bonds due February 2027 rose 62 basis points, or 0.62 percentage point, to 8.98 percent, the highest since June 2012, and within 11 points of the record high.
“The decision is intended to prevent inflation and financial-stability risks connected with the recent high volatility in the financial markets,” the central bank said.
The rate increase is not only unlikely to curb the ruble selloff, it may add to the panic, Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said in e-mailed comments.
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To contact the editor responsible for this story: Torrey Clark at