Russia puts up interest rates to 20% as rouble tumbles 40%

In an effort to stop the rapid decline of the rouble to protect Russians’ savings the central bank have increased interest rates from 9.5% to 20%. Furthermore, citizens have been withdrawing money from ATM machines with the loss of confidence in the economy. In order to try and stem the 40% decline in its currency the Russian central bank has been buying roubles with its foreign currency reserves. In the foreign exchange market this, in theory, should have the following effect:

  • increases the demand for the rouble – Demand curve to the right – price up of rouble
  • increases the supply of foreign currency – Supply curve to the right – price down foreign currency.

Another worry for Russia is the downgrade of Russian debt to junk status by Standard & Poor’s the credit rating agency. Below is a mind map that shows the factors that are impacted by a falling exchange rate.

Adapted from: CIE A Level Economics Revision by Susan Grant

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