Bank of Russia Raises Key Rate to 20%

The Bank of Russia is raising its key interest rate to 20%. It had been at 9.5%. The central bank says external conditions have drastically changed and the hike is necessary to make bank deposits attractive. Bloomberg Economics’ Scott Johnson discusses the move on “Bloomberg Daybreak: Europe.”

Lines coming fast and thick really a quickly moving situation but i do want to get your initial thought on this bank of russia again their key rate is moving to 20 percent had been in 9.5 they’re saying that this is necessary to make deposits attractive what’s your initial thought on that it’s an extraordinary move yeah i think it shows you just the the significance

Of this event um that’s that’s a a bigger hike than we saw in december 2014 um when which is one of the more recent analogs we can look back to um it’s really an extraordinary action by the central bank well also there’s this question of reserves at the central bank what’s accessible for them what’s not accessible for them after this weekend what’s the current

Read on that i think those are still unknowns and and very important unknowns we also don’t know what kind of workarounds they have potentially to you know work with other countries to establish swap lines i think the broader question is not just whether the central bank uh you know could run out of reserves um in a situation like that it’s it’s what’s what’s the

Confidence in the broader uh financial sector um i think you know that that could be a bigger issue for them at this point and as we see this this twenty percent uh this hike to twenty percent is um is obviously an attempt to restore confidence right do they what so you mentioned some of the levers that they have this hike to 20 being some being one of them what

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Are those is is it mainly just looking to other countries to help with their fx reserves uh well there’s been a huge demand uh for cash obviously we sold queues at atms over the weekend um the ruble is uh is has is plunging in offshore markets um so i think you know when we look at their their options at this point um you know some some form of capital controls

Uh we’ve already seen uh restrictions on foreigners selling russian assets um so we can see more of that um so it doesn’t necessarily mean that this continues as a run on the banks because there could be capital controls that would step in when you look at contagion risks how are those likely to evolve if you can look into your crystal ball what are the wider

Implications from russia emanating to the larger global economy i think at this point the the main uh channels for for disruption of the global economy would be energy prices and then a global uh you know risk-off scenario we were uh last week even ahead of these these these latest sanctions we were looking at three scenarios and and one would be something

A little bit like what markets have priced in last week um where you see um i think i think there were expectations of a relatively uh you know brief uh crisis that could see energy prices stabilize um but uh with these additional actions i think we’re looking more at our second scenario which is uh yeah you know more severe disruption there’s potential for

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Disruption to the energy market i think we’ve already seen some signs of uncertainty over over supply but to a limited degree um and and i think in that scenario we’re looking at more inflationary pressure in europe and the us um that doesn’t actually mean that the um you know economy is running off track um but it certainly raises the risk of a downturn in

Europe for the u.s it’s a little bit more removed and so i think we’re we’re looking at um still in in that second scenario we might might still see uh you know fed rate hike in march the more extreme scenario is more disruption to energy markets it is really a complicated proposition because so many of your inputs need to change um you have perhaps a move

To change the energy sector as a whole remove their alliance you have germany and all of your potentially spending more on defense how do those factors have those factors changed the longer term economic outlook for you and the team when it comes to europe well i think these are are really longer term uh questions and and and i think that’s that’s going to be

A little bit more slow slow moving at the moment events are moving very very fast as we try to uh you know get uh get a hold on on what’s happening

Transcribed from video
Bank of Russia Raises Key Rate to 20% By Bloomberg Markets and Finance