Business News

Russia hikes rates as Ukraine tensions build


Russia's central bank has raised interest rates from 5.5 percent to 7 percent, in an effort to stabilize its currency and offset inflation, as concerns about the economic impact of a potential war with Ukraine increased.

"The decision is directed at preventing risks to inflation and financial stability associated with the increased level of volatility in the financial markets," the central bank said in a statement.

Viktor Drachev | AFP | Getty Images

Russia has been threatened with economic sanctions by the U.S. after it effectively invaded the Crimea following a change of government in neighboring Ukraine.

(Read more: What the Ukraine crisis means for markets Monday)

Russia's main stock index, the Micex, fell by 5 percent Monday morning, and the rouble plunged against the dollar.

The move will not work in the short term, according to Jane Foley, senior foreign exchange strategist at Rabobank.

(Read more: Could Ukraine trigger full-blown emerging markets crisis?)

"Reading between the lines, it seems like the Russians are very fearful of capital outflows, and if the rouble continues to weaken, that will also send inflation up," Foley said.

This story is developing. Please check back for further updates.

- By CNBC's Catherine Boyle. Twitter: @cboylecnbc.