Russia's central bank announced on November 5 that it would restrict interventions on the currency market to $350mn per day, in a move towards a ruble free float scheduled for January 2015.
The ruble's devaluation continued following the decision, reaching RUB44.87 to the dollar, down from RUB43.83 at the opening of trading. The drop of 2.6% was one of the largest single-day drops of the last 10 years.
The central bank raised its main interest rate by 150 basis points on October 31 due to inflation fears, but this had little effect on the ruble's continued depreciation. The ruble has dropped in value against the dollar by around one-third since the start of the year.
"In case the value of the dual-currency basket [of dollars and euros] stays on or outside the borders of the operational band during the whole trading session, the volume of Bank of Russia interventions will not increase past $350mn," the bank's statement said.
Previously the bank defended every 5 kopeks of the corridor with $350mn, sometimes spending billions of dollars in the course of a day as the trading corridor shifted multiple times, with the ruble's value plunging over recent weeks. Central Bank interventions in October totalled over $30bn.
"As a result of the implementation of this decision, the ruble exchange rate will be determined predominantly by the market factors," the bank added. The bank also said that in the case of a threat to macroeconomic stability it would intervene as much as required to stabilise the situation.
Russia's central bank, under the watch of former economy minister Elvira Nabuillina since 2013, has long said it plans to switch to inflation targeting and a ruble free float by 2015, replacing exchange rate supervision as the cornerstone of economic policy.
But the move to a free float is increasingly looking like a major devaluation to revive growth in the Russian economy as part of a policy of import substitution, as well as to adjust to life after quantitative easing, as emerging market currencies and commodities fall across the board.
"For all practical purposes the changes make the band irrelevant and mark the shift to a dirty float system," believes VTB Capital's Vladimir Kolychev. “The Central Bank has finally done it, the ruble has de facto become a fully flexible currency,” said economist Dmitry Polevoy of ING Bank in a research note.
The move towards a free float will help the central bank protect its hard currency reserves, of which it has spent over $60bn since the start of the year, endangering Russia's crucial investment grade rating.
Economists believe that the ruble is now approaching its market value, which may lie as low as RUB47 per dollar given a slide in the price of oil to around $80 per barrel. The central bank's first deputy head, Kseniya Yudaeva, told media that the ruble should stabilise by the end of the year, and that she regarded the ruble as already oversold.
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