The Central Bank of Russia (CBR) widened its corridor for the ruble and announced a cut in interventions on August 18. The central bank said the move is part of its effort towards a free-floating ruble, and comes despite the ongoing pressure on the currency due to geo-political tensions.
"The permissible range of the dual-currency basket ruble values (floating operational band) was symmetrically widened from 7 to 9 roubles, according to a CBR statement. The central bank added that it will no longer intervene in the foreign exchange market if ruble is within the permissible band; it has previously been intervening at specific levels.
The move, which takes the trading band against the mixed dollar/euro basket to 35.40 - 44.40, reverses a strengthening of exchange rate controls which was undertaken in March - the same month Russia annexed Crimea from Ukraine, procuring the wrath of the West. The same month, the CBR hiked its intervention threshold from $350m to $1.5bn.
That allowed the central bank to pledge $25bn to support the currency after steep falls alarmed markets and aggravated capital flight as the population rushed to buy dollars. However, the CBR also took the threshold back to $350m as it returns its focus to inflation.
That support for the ruble over the last six months or so has clearly been important, however. The US and EU sanctions against Moscow over its alleged support for pro-Russian separatists in eastern Ukraine have left it one of the worst performing currencies in the world, recording new record lows against the dollar.
The ruble is currently down around 9% against the US currency since the start of the year. It also continues to trade with high volatility. An unconfirmed claim from Ukraine on August 15 that it had destroyed part of a Russian military convoy saw the Russian currency drop 0.51% to finish the day at 41.70 against the basket, to leave it 6.4% below levels in June.
However, the CBR's move to reduce support was initially welcomed by the market, with the ruble strengthening 0.3% in the wake of the announcement, Analysts at SEB write that they "expect further steps to relax the control of the RUB to come in the months ahead." That said, they also warn that their 12-month outlook for the USD/RUB currency pair remains at 38.5, compared with a current range of 35.95-36.15. "We see the deprecation as a result of a weak economic outlook and a likely continuation of political uncertainty," they write.
"The stated changes have been made within the framework of moving to an inflation-targeting regime, one of the essential conditions for the successful realization of which is stopping managing the exchange rate," the central bank said, reiterating that it aims to move to a free float by next year. The CBR has announced that the ruble's trading corridor will be completely abolished by January 2015, and that regular daily interventions will cease, barring emergency interventions required to preserve financial stability.
Despite the ongoing pressure, analysts welcomed the move as proof of the CBR's determination to allow the currency float, particularly in the current environment. They also point out that it only makes another interest rate hike next month even more likely, albeit the ban on food imports from the West enacted in late July had already made that a shoe-in due to its effect on inflation.
"The central bank had recently said that it would take such a step, so [the] decision was unsurprising," suggest analysts at Sberbank. "The consistency in moving toward a freely floating RUB amid a worsening market environment is a strong testament to the regulator's resolve to shift to full-fledged inflation targeting. We expect one or two more basket adjustments later this year before the band is finally removed in January 2015. We could see a reduction in intervention volumes, further band widening, or both."
"We welcome the fact that despite persistently high geopolitical tensions, the CBR has returned toward a free-floating ruble," adds Alfa Capital's Natalia Orlova. "All else being equal, looser FX management suggests a higher reliance on interest rate policy tools, which speaks in favor of another rate hike during the next CBR BoD meeting in mid-September."
VTB Capital analysts also expect a rate hike in December: "[S]hould the RUB come under significant pressure, the CBR will be inclined to increase rates further, citing inflationary risks related to FX pass-through. That said, the probability of a rate hike at the next meeting has increased in any case in light of elevated food inflation."
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