Russia Raises Rates 6.5%

In last Friday’s CWS Market Review, I wrote:

The ruble is looking more like rubble. Russia estimates that inflation will hit 10% next year. The Russian Fed raised interest rates again this week, but the forex market just laughed at them. I don’t blame them. Despite a lot of talk, the Bank of Russia simply isn’t serious about defending the ruble. The BOR raised rates by 1% to 10.5%. Please. If they’re serious, they would have raised rates by 2% or 3%. That’s what needs to be done.

Someone must be listening to me. The Bank of Russia just announced that it’s raising interest rates to 17%. That’s a stunning increase of 6.5%. The increase was announced at 1 a.m. As a rule of thumb, anything done by a central bank in the middle of the night is probably bad news. It’s also probably very important.

Russia is in a classic situation that many countries have faced before. The international currency and bond markets have lost faith in the ruble. Every day it’s been attacked. Until now, Russia has attempted, rather weakly, to defend the indefensible ruble. The defense hasn’t been nearly adequate but they’ve finally taken a tough stand.

These currency wars are characterized by an odd feedback relationship. If the markets have faith in the government, then the crisis ends. If they don’t, the situation worsens and it thereby becomes more difficult for the government to do what needs to be done. It’s not so easy to turn a vicious cycle into a virtuous one. Nearly every government leader since the dawn of time has blamed a currency attack on “speculators,” though I’ll note that these evil speculators have an odd habit on ganging up on currencies that can’t withstand attacks. Funny, that.

Russia is in much better shape than they were in 1998. During the crisis 16 years ago, Russia raised rates to 150%. Make no mistake: The big rate hike is a war on the shorts. Check out the amazing decline in the Russian ETF ($RSX). It’s lost 35% in the last three weeks.

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Posted by on December 15th, 2014 at 10:39 pm


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