Five thousand Russian rouble banknotes pass through a money counting machine at a store in Moscow. The rouble weakened 3.3% to 43.0140 per dollar on Friday, the biggest daily drop since August 2011.
Bloomberg
The Russian central bank’s gambit worked for all of about two minutes on Friday.
That’s how long the rouble rallied after policy makers surprised investors by ratcheting up the benchmark interest rate 1.5 percentage points to 9.5% on Friday afternoon. After that, it was right back to declines for the world’s worst-performing currency, with losses swelling to as much as 3.6% against the dollar, the biggest drop in three years.
While the rate increase was a full percentage point bigger than analysts expected, it was what policy makers opted not to do – revamp their foreign-exchange intervention programme – that got traders’ attention the most and turned sentiment back against the rouble. Speculation a plan would be unveiled to allow the Bank of Russia to be less predictable and more aggressive in its interventions had fuelled the biggest rally in the rouble on Friday since at least 2003, briefly snapping a rout that had seen the rouble slip 7.9% last month.
“The rate increase alone doesn’t change anything,” Dmitry Polevoy, chief economist for Russia at ING Groep NV, said by e-mail on Friday. “The central bank either doesn’t understand the root of the problem or is afraid to act. Or both.”
The rouble has been plunging as Russians pull capital out of the country amid a stand-off with the US and its allies over President Vladimir Putin’s actions in Ukraine. Sanctions imposed by the White House and the European Union have shut Russian companies out of foreign capital market and threaten to push the $2tn economy into recession.
The rouble weakened 3.3% to 43.0140 per dollar at 8:34 pm in Moscow on Friday, the biggest daily drop since August 2011. Against the central bank’s target basket of dollars and euros, the currency dropped 3.1% to 47.9267.
Goldman Sachs Group and Commerzbank AG said policy makers should have scrapped the intervention rules to gain more freedom to smoke out speculators by selling dollars without warning or limit. Russia has spent $71bn of its reserves to defend the rouble this year.
Central Bank Governor Elvira Nabiullina raised the benchmark rate by 1.5 points to 9.5%, the biggest tightening since Russia’s March incursion in Crimea and compared with the median forecast in a Bloomberg survey of 31 economists predicting a 50 basis point increase.
The Bank of Russia, which is fighting to keep price growth from speeding up, will be ready to start monetary easing if “external conditions improve” and inflation shows a “stable downward trend,” according to its statement yesterday.
Under the current rules, the central bank automatically intervenes to defend the rouble once it reaches the boundary of its trading band. Once it has spent $350mn supporting the currency, the central bank moves the band by 5 kopeks.
It repeats the process each time the currency falls by 5 kopeks.
Policy makers are showing “consistency” by sticking to their plan of moving to a free floating exchange rate only in 2015, according to Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp in Moscow.
The central bank said in an e-mailed statement to Bloomberg News on Friday that its intervention policy didn’t change, when the rouble gained as much as 5.1% per dollar.
The monetary authority only intervenes at the edge of its corridor for the rouble, it said. The Bank of Russia’s rates statement made no mention of exchange-rate policy.
While the interventions have reduced Russia’s reserves 14% this year to $439bn, that’s still a fraction of the $222bn drop between August 2008 and March 2009 when Lehman Brothers Holdings’collapse triggered a slump in oil prices.
The monetary authority sold about $74bn of foreign currency in December 2008, compared with $28bn so far this month, central bank data show.“The scale of reserves losses is not that dramatic, especially compared with 2009,” Osakovskiy said.
The longer Nabiullina keeps its intervention policy crystal clear, the longer traders will profit from keeping short positions and betting on further depreciation, Goldman Sachs analysts Clemens Grafe and Andrew Matheny said.
“The market is likely to test if the central bank is sticking to its ruble intervention policy in the coming days,” Grafe and Matheny wrote in an e-mailed note.