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28 Nov, 2008 13:20

CBR hikes refinancing rate as Rouble balancing act gets tougher

Russia’s Central Bank raised its refinancing rate for the 2nd time this month, and 6th time this year, in a bid to fight inflation and stem capital outflow.

The bank said on Friday its refinancing rate would rise to 13%.  Its a 1% hike – accompanied by an increase in the 1 and 7 day repurchase auction rates to 10%.  With inflation being stoked by the weakening rouble, the CBR says the move is needed.

The higher refinancing rate will make credit less affordable for Russian companies according to Head of Russia’s Union of Industrialists and Entrepreneurs, Aleksandr Shokhin.

“Before this increase, banks provided credits at a 15-25 % interest rate. Companies’ efficiency decreases so they can’t afford expensive credits.”

At the same time, the Central Bank also allowed the Rouble to weaken by another 1% on Friday. Some businessmen, such as Viktor Vekselberg, who owns stakes in export -oriented oil and metals companies are urging the government to devalue the Rouble further.

“The decision on interest rates is closely connected with the decision on the Rouble exchange rate. If we see further Rouble devaluation this rate won’t look that prohibitive.”

Some analysts say the Rouble will weaken by at least 20% in the coming months – with the government reluctant to spend its reserves to support the currency.  But many are also saying it would make more sense – to ease the capital flight from Russia and to get credit moving again – if the Rouble were to be devalued in one hit.

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