Repo Rates Raised To Support Ruble

The Central Bank will hike most interest rates by 100 basis points from Feb. 10, it said Monday, fulfilling a promise to tighten monetary policy to support the ruble, which reacted with modest gains.

Central Bank officials have said interest rates will be part of the arsenal used to ensure that the ruble does not weaken beyond the 41 level against its euro/dollar basket, identified as the currency floor after more than two months of gradual devaluation to adjust to weak oil prices and the worst economic outlook in a decade.

Using interest rates to support the ruble should counter inflation, a major problem fuelled by the devaluation, as well as helping Russia preserve some of its foreign currency reserves after spending over a third, or some $200 billion, over the past six months to prop up the ruble.

The minimum rate at the Central Bank's one-day repo auctions -- a key source of banking sector liquidity -- will be raised to 10 percent from 9 percent, the bank said Monday.

The intent is to "contain inflationary tendencies and ensure the stability of the exchange rate of the ruble," it said.

Rates for a range of other operations will also be hiked. The only ones unaffected were the ruble currency swap rate, the refinancing rate and rates linked to the refinancing rate.

The ruble closed 0.4 percent stronger at 40.71 versus the basket. It touched the Central Bank's 41 trading band boundary just once, briefly, last Thursday.

"It [the Central Bank] promised and it hiked. ... It seems it does not really trust the [currency] speculators who have retreated a little, it thinks they may go on the attack again," said Nikolai Kashcheyev, analyst at MDM Bank.

"God willing, the Central Bank will pass along the thin bridge between economic slowdown and ruble stability."

Inflation is also a big problem, despite easing global price pressures. The Economic Development Ministry expects consumer prices to rise 3.8 percent to 4.0 percent in the first two months of this year, compared with a 3.6 percent increase in the same period of 2007, Interfax reported Monday.

By raising interest rates for its key liquidity operations, the Central Bank hopes to discourage commercial banks from borrowing rubles and instead to prompt them to exchange some of their dollar and euro holdings into rubles.

"We expect the deficit of ruble liquidity to ease further pressure on the ruble in the near future. As a result, we reiterate our belief that the Central Bank will be able ... to defend the 41/basket support level, at least in the near future," UniCredit analysts said in a research note.

For their part, commercial banks such as state-controlled Sberbank have been raising rates on ruble savings accounts and cutting them on foreign currency ones.

Higher rates may help lure back foreign investors who fled Russia in droves following a summer war with Georgia and the subsequent deepening of the global financial crisis. Russian rates compare favorably with U.S. rates of as low as zero, Britain at 1 percent and the euro zone at 2 percent.