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. Last Updated: 07/27/2016

Rate Hike To Boost Economy, Experts Say

The Central Bank dramatically lifted its lending rate to commercial banks to 140 percent from 120 percent on Tuesday in a move to stabilize the economy that is also likely to hurt struggling Russian companies.

Economists said the increase would have far-reaching implications, helping to steady the inflation rate and the value of the ruble.

The higher interest rate, analysts said, would discourage speculation in the country's currency market, which has been spurred by the relatively inexpensive cost of borrowing compared with the inflation rate.

But the move is also likely to squeeze Russian companies in need of LOANS to finance expansion or retooling.

"Companies of all kinds will be hurt", said Dennis Kiselyov, an economist at the World Bank in Moscow, "but especially those who want to borrow long-term for investment projects".

The increase is the fourth since April, when the bank's lending rate was 80 percent, and the third hike in June alone.

In an accord struck last month with the government, the Central Bank agreed to raise its rate to a few percentage points below the prevailing rates charged by commercial banks, which is now between 150 and 180 percent.

The accord, which also calls for reducing the monthly inflation rate to 10 percent by December, was a precondition for the International Monetary Fund to give the first half of a $3 billion loan earmarked for Russia.

The IMF intends to release the first $1. 5 billion Wednesday, the Washington Post reported, quoting U. S. and financial sources.

But the interest rate increase comes at a tough time for the Russian economy, which is embedded in a deep recession. Industrial production has fallen by 20 percent in the past year, a time when many Western governments would typically lower interest rates to stimulate their economies.

"It will not affect the profit of the banks", said Boris Sergeyev, general director of the economic research department at Tokobank in Moscow, "but it will affect the clients".

Sergeyev warned of a possible increase in debts between enterprises, as companies find they cannot borrow money to pay what they owe. This could increase defaults on other bank loans and make financial institutions less likely to make loans.

"The government had to choose between a high inflation rate and high interest rates", Sergeyev said. "I can understand their choice".

The increase in the interest rate means that the bank's rate is nearing the country's inflation rate. The Central Bank's new rate translates into an effective monthly rate of 115 percent, still below the inflation level of 19 percent in May, but far higher than it has been.

In April, with inflation at 17 percent monthly, the Central Bank's lending rate was effectively 6. 5 percent per month, amounting to a major subsidy to the borrower.

The low cost of this money has spurred speculation in hard currency. With the ruble dropping by 10 to 12 percent monthly, it paid for banks to borrow money from the Central Bank to buy dollars on the currency exchange.

"It makes it more costly to arbitrage on the currency exchange rates", Peter Derby, president of the U. S. joint venture Dialogbank, said of Tuesday's increase.

The ruble strengthened again on the Moscow Interbank Currency Exchange on Tuesday. It rose to 1, 060 to the dollar from 1, 061 on strong trading of $40. 52 million. Traders attribute the renewed vitality of the currency, which has increased from its low of 1, 116 in mid-June, to active Central Bank intervention. But economists said it was possible that the higher interest rates were beginning to have an impact.

"The fact is the ruble has stood almost still against the dollar while inflation is running at 15 to 17 percent per month", said Kiselyov of the World Bank. "In the general framework of stabilization, together with other measures, this is very important".