Central Bank of Russia raises interest rates to 20% to control money outflows from bank accounts

An increase in interest rates will help the central bank limit the outflow and withdrawal of cash from savings accounts.

On Monday, February 28, the Central Bank of Russia aka the Central Bank of Russia doubled interest rates from 9.5% to 20%, in what appeared to be an urgent move to control cash outflow.

Bank of Russia interest rates

In the last week, the Russian Ruble has dropped nearly 40% to as low as 120 against the US Dollar. Russia’s central bank has also ordered export-focused companies to sell foreign currency as the ruble collapses to a record low.

On Sunday, February 27, Russian President Vladimir Putin ordered his military commanders to place their nuclear armed forces on high alert. The West has been introducing massive sanctions against Russian financial institutions to cut them off from the rest of the world.

In the recent set of sanctions, the US and its NATO allies banned Russia from participating in the SWIFT trading system. The Central Bank of Russia said it is targeting inflation at 4% and will take all necessary measures to ensure financial stability.

The recent collapse of the Russian Ruble has eroded its purchasing power and as a result people have withdrawn huge sums of money from their savings bank accounts. Areas like Moscow and St.Petersburg saw long lines of people withdrawing money from ATMs.

Therefore, the Central Bank said that the decision to raise interest rates will bring deposit rates to the level “necessary to offset the risks of slippage and rising inflation”. It added: “This is necessary to support financial and price stability as well as protect people’s savings from devaluation.

What do Western sanctions mean for Russia?

Russia is currently the world’s third-largest supplier of oil and gas and holds $630 billion worth of reserves. However, most of these cash reserves are in foreign currencies such as the dollar (USD), euro (EUR) and British pound (GBP). Besides, Russia also has a lot of cash reserves in Gold.

However, severe sanctions imposed by the West will limit Russia’s access to cash. Last month, the Central Bank of Russia was forced to put more cash into ATMs as demand for cash hit its highest level since March 2020.

The last time Russia raised interest rates to 17% was when it annexed Crimea in 2014. In a series of recent events, central banks said:

“External conditions for the Russian economy have changed dramatically.”

Russian authorities have also asked brokers to prevent short selling on the Russian stock market. It also ordered brokers to stop executing orders from foreign organizations and individuals to sell Russian securities.

Note to investors, BCS Global market speak:

“These measures may help ease growing market stress, but at the same time they undermine the foundations of monetary policy, its focus on inflation targeting, and flexible exchange rates.”

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Bhushan Akolkar

Bhushan is a FinTech enthusiast and has a good understanding of the financial markets. His interest in economics and finance draws his attention to the emerging Blockchain Technology and Cryptocurrency markets. He is constantly in the learning process and keeps himself motivated by sharing his acquired knowledge. In his spare time, he reads horror fiction novels and sometimes explores his culinary skills. Central Bank of Russia raises interest rates to 20% to control money outflows from bank accounts

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