Russia hikes its interest rate to 17 PER CENT in desperate effort to prevent collapse of rouble and save its stricken economy
- Surprise interest rate announcement was made at 1am Moscow time
- Largest single rise since 1998, when rates soared past 100 per cent
- Move seen as a desperate effort to prevent collapse of Russian currency
- Country hit by plunging global oil prices on which economy heavily relies
- Western sanctions over conflict in Ukraine have also taken a massive toll
Russia dramatically raised its interest rate from 10.5 to 17 per cent overnight in a desperate effort to prevent the collapse of the rouble and boost its stricken economy.
The surprise announcement was made at 1am Moscow time and comes after the rouble's value has sunk roughly 50 per cent since January - battered by plunging worldwide oil prices and Western sanctions imposed over the conflict in Ukraine.
The move is Russia' largest single rise since 1998, when interest rates soared past 100 per cent and the government defaulted on debt.
Russia's economy is threatened by paralysis as the tumbling value of its currency pushes inflation to dangerous levels.
The overnight action has somewhat allayed fears, however, prompting an immediate gain in the rouble and leaving it 1.6 per cent up on the Asian stock market.
Money worries: Russia dramatically raised its interest rate from 10.5 to 17 per cent in a desperate effort to prevent the collapse of the
rouble and boost the economy. Many experts believe the decline in the economy could eventually lead to President Vladmir Putin
being ousted from office
Fighting: The surprise announcement comes after the rouble's value has sunk roughly 50 per cent since January - battered by Western sanctions imposed over the Ukraine conflict (pictured)
The Bank of Russia's aggressive move illustrated the size of the economic perils confronting Russia and reflected fears that the ruble's decline could trigger consumer panic and incite a run on banks.
By raising interest rates, the central bank hopes investors will find it more financially appealing to keep their money in Russia rather than moving it to Western Europe, Asia or the United States.
'They did it as a lure to encourage people to keep their rubles at home rather than continue to flee the currency and the country,' said Barry Eichengreen, an economist at the University of California.
'It's a way of buying time. It doesn't solve any of the underlying issues that the Russian economy has,' he added, referring to falling energy prices, Western sanctions and widespread corruption.
Vital: The Russian economy is reliant on the price of oil extracted from its Siberian rigs (pictured)
Such challenges are especially difficult because Russia's economy relies so heavily on petroleum revenue and lacks the diversification to withstand severe economic downturns.
That tends to leave Russia at the mercy of global financial markets, where oil is priced in dollars.
The average price of a barrel of oil has dropped below $56 from a summer high of $107.
The Russian government recently downgraded its growth forecast for next year, predicting that the economy will sink into recession.
Still, the Bank of Russia's latest action carries dangers of its own.
By jacking up rates to try to contain inflation, it risks inflicting further economic damage, Eichengreen noted. Though high interest rates can attract investor money, they can also stifle growth by making it harder for consumers and businesses to borrow and spend.
The announcement in Moscow came after U.S. and European markets had closed.
Stocks have suffered in recent days amid the steady drop in global oil prices. The sell-off could continue if investors view the Bank of Russia's move as ineffective.
The central bank has gradually raised the rate from 5.5 per cent early this year to 17 per cent now.
Last Thursday, it tried unsuccessfully to stem the ruble's slide by boosting its key rate by 1 per cent point to 10.5 per cent. It cited a surge in consumer prices and a 'significant inflation risk.'
The Bank of Russia said then that it expected prices to rise 10 percent for 2014 and climb further in the first quarter of 2015. But the ruble plunged further yesterday, dropping from 55 rubles to the dollar on Thursday to about 65 rubles to the dollar by the close of the markets last night.
Historic: The move is Russia' largest single rise since 1998, when interest rates soared past 100 per cent, the government defaulted on
debt, and people queued on Moscow's streets to withdraw their savings (pictured)
A falling currency increases the cost of imports, stoking inflationary pressures. At the same time, plunging oil prices limit the government's ability to fight a downturn and forces it to borrow more.
The sanctions imposed by the West have magnified Russia's economic turmoil.
In September, the United States and the European Union announced a new round of sanctions over Moscow's involvement in Ukraine, which included blocking Western financial markets to key Russian companies and limiting imports of some technologies.
The additional sanctions were expected to cause enough pain to put Russia into recession for one or two years, predicted economist Alexei Kudrin, who served as finance minister under President Vladimir Putin for 11 years until 2011.
The potential for a prolonged downturn caused investors to pull their money from the country, causing the ruble to further lose value.