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. Last Updated: 07/27/2016

Interest Rate Increased To Approach Inflation

The Russian Central Bank lifted its basic interest rate to 592 percent Friday from 512 percent previously, confirming that the government is bent on a credit squeeze as part of its anti-inflation program.

The rate hike exceeds the expectations of government reformers who had called for rates to be lifted to only 535 percent, and means rates are now close to Russia's inflation rate which is predicted to be 1, 000 percent this year.

Boris Sergeyev, lead analyst for Tokobank, a leading Russian commercial bank, said the increase indicates that the Central Bank has backed calls by Finance Minister Boris Fyodorov to fight inflation first and stabilize the ruble.

Igor Doronin, head of the Moscow Interbank Currency Exchange's analytical department, said that higher rates would push up the ruble's exchange rate because it increased the risks for banks that borrowed to speculate in currency.

Under Russian financial convention, interest rates are expressed differently to standard banking practice. In Russian terms, the Central Bank raised rates from 180 percent to 210 percent. Interest rates were 80 percent at the start of the year.

The Finance Ministry and Economics Ministry have launched a series of measures in the past month to soak up excess cash which has fueled inflation.

The higher rates come as signs emerge of a serious cash shortage in the Russian banking sector. The Russian Central Bank recently froze the accounts of 22 banks running deficits on their transfer accounts.

Sergei Vassiliev, an economist with the government's Center for Economic Reform, said that if the government maintained its current policy, there would be a credit squeeze and possibly a deepening of the recession in the first quarter of next year.

Fyodorov said this week that despite efforts to control spending, there would still be a deficit of 4. 6 trillion rubles for the fourth quarter, with inflation as high as 15-20 per month at the end of the year, above predictions of 10 percent.