It’s when, not if, Bank of Russia buys currency for reserves

For economists locked in a waiting game with Russia’s central bank, the divide is over whether its foreign-currency purchases resume in the coming months or only in the years ahead.
Absent from the currency market since 2015, the Bank of Russia will start buying for its international reserves again this year, according to just over half of respondents in a Bloomberg survey of 21 analysts conducted May 2-4, with 28% believing purchases may begin already next quarter.
The option remains among the most potent tools left in Russia’s arsenal should the authorities choose to dig in against the rouble’s appreciation. The measures tried so far – from purchases of foreign exchange by the Finance Ministry to a bigger-than-forecast rate cut by the central bank last month – have done little to cool of the currency, a top-5 performer in emerging markets this year with a gain of almost 6% against the dollar.
In 2015, the Bank of Russia began buying foreign currency when the rouble was near 50 against the dollar. For most of this year, the Russian currency has traded between 56 and 60. It was 0.5% weaker at 58.24 versus the dollar last week in Moscow.
The share of respondents seeing the central bank’s purchases start in the second half of 2017 rose to 44% from 37% in last month’s poll. At the same time, 28% now say that policy makers will wait until 2019 or later, compared with 11% in the previous survey.
Although a plurality of analysts see no specific rouble trigger, 30% predict a gain to 50-55 against the dollar would set off the operations. Other catalysts may include rising oil prices and an undershooting of the 4% inflation target, the survey showed.
The central bank, which in 2015 announced a goal of boosting reserves to $500bn in the long term, won’t bring its stockpile to that level until 2020 or later, according to 65%, up from 48% in the last poll.
The Bank of Russia has allowed the market to set the exchange rate since 2014, pledging to avoid interventions unless the rouble’s swings threaten financial stability. It’s made a resumption of foreign-currency purchases conditional on meeting its inflation target of 4%, with Governor Elvira Nabiullina saying in March the operations can’t present a risk to the goal or threaten it over the medium term.
With price growth possibly dropping below the target in the first half of the year, policy makers face one less hurdle to reviving a programme that contributed to a bout of rouble weakness and a spike in volatility when they last tried it in 2015.
As a stronger currency weighs on exports and the budget, some cabinet officials have recently stepped up verbal interventions. President Vladimir Putin added to the speculation, saying last month the government is working on “market-based measures” to affect the exchange rate.
The Bank of Russia won’t pull the trigger until the rouble reaches an “equilibrium” and policy makers are sure their actions won’t lead to faster inflation, according to Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage.
“There are indications of both” conditions being in place, allowing for purchases to start already in the third quarter, he said.
Beyond selling roubles in the currency market, the central bank’s options are limited. Even after its April rate cut of half a percentage point to 9.25%, most economists said the move simply represented a front-loading of monetary easing rather than an acceleration. As a result, only three analysts said they’d actually adjusted their end-2017 forecasts for Russia’s key rate.
“The latest aggressive cut was fuelled by concerns of economic authorities that the rouble has become overvalued given the crude price levels,” said Vladimir Miklashevsky, senior strategist at Danske Bank in Helsinki. “Aggressive monetary easing would add steam to economic growth in Russia, while the Bank of Russia’s consistency in communication could be jeopardised.”