MOSCOW - The Russian central bank announced Wednesday it would limit its support for the ruble, letting the currency which has already taken a hit from the Ukraine crisis sink to a new record low.
People walk under a chain of currency exchange offices in central Moscow on January 27, 2014
After having recently spent billions of dollars per day to support the ruble in a flexible trading band that limited swings in the currency, the Bank of Russia said it would end its unlimited daily interventions to avoid speculation against the currency.
By limiting its daily interventions to $350 million (280 million euros) the central bank is in effect letting the ruble float freely.
The currency immediately tumbled to new record lows.
It weakened as far as 56.36 to the dollar from 44.98 at the start of trading, before recovering somewhat on comments from a senior central bank official that the Bank of Russia would step in in case of severe shocks.
"We have judged it necessary to keep inventions in certain cases ... above all to avoid serious shocks on the market," said Ksenia Yudayeva, one of the Bank of Russia's first deputy governors, according to news agencies.
She added she expected that she expected a stabilisation of the market "by the end of the year".
The ruble has shed about a quarter of its value since the beginning of the year as Western sanctions on Russia over its role in the Ukraine crisis have led to a surge in capital flight from the country.
The sanctions have also made it nearly impossible for Russian companies to borrow in the West, with the local currency market under pressure as firms buy dollars to repay existing loans.
Russia's central bank on Friday jacked up its interest rates by 1.5 percentage points to 9.5 percent in a bid to shore up its currency, but the move proved futile.
The slump in the ruble has led to a surge in inflation to 8.3 percent.
Although Russian consumers are feeling the pinch in the form of higher prices, recent opinion poll show that has yet to hurt the popularity of President Vladimir Putin.
The Bank of Russia had been planning to move to allowing the ruble float freely in January so it could move to concentrate on fighting inflation.
Neil Shearing, chief emerging markets economist at Capital Economics in London, said the ruble had been coming under speculative pressure as investors were betting the ruble would tumble when the central bank lets it float.
"This should help to limit the risk that the plunge in the ruble over the past month develops into a self-fulfilling currency crisis," he said in a note to clients.
"The ruble is likely to weaken further over the coming days, but should find a floor more quickly than would have been the case under the old framework," he added.
He said Capital Economics is still reasonably comfortable with its forecast of 45 rubles to the dollar over the next six months.