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Crashing ruble puts Russia's central bank in bind

Mar 19. 2020
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By Syndication Washington Post, Bloomberg · Anya Andrianova · BUSINESS, WORLD, US-GLOBAL-MARKETS, ASIA-PACIFIC

The Bank of Russia stepped in to slow the ruble's plunge, highlighting the challenge it faces as it tries to cushion a double blow from coronavirus and the plunge in oil prices.

While many central banks are slashing rates, the Bank of Russia is expected to hold steady at its rate meeting Friday. Options markets are betting rate hikes are possible within the next three months as the ruble traded near its weakest level in four years.

The ruble rebounded on Thursday after the central bank said it will begin additional foreign currency sales if the price of Urals crude is below $25 a barrel, a level it has already reached. This could mean about an extra $800 million of sales a month, according to VTB Capital.

"The sales should ease pressure on the ruble," said Tatiana Evdokimova, an analyst at Nordea Bank in Moscow. "The central bank is trying to do everything it can to stabilize the ruble while inflationary pressures aren't so high that they make a rate increase inevitable."

Emerging-market central bankers face a dilemma in how to respond to the global market crash. Most are taking their cue from developed markets and opting to try to boost growth by cutting rates, but they risk exacerbating capital outflows that are already at a record high.

Russia's economy has suffered a double blow as President Vladimir Putin's oil price war with Saudi Arabia adds to the fallout from the global spread of coronavirus. The government this week set up a $4-billion fund to aid companies affected by the virus, and the Bank of Russia softened some lending requirements for banks.

Anticipating the need for extra guidance amid the market volatility, Governor Elvira Nabiullina called an off-schedule online news conference after the rates meeting on Friday.

The Federal Reserve cut interest rates for the second time this month and more than a dozen central banks including Turkey, Brazil and Poland have reduced borrowing costs since Sunday. Even after six reductions in the past year, the Bank of Russia still has plenty of room to cut if it decides to support growth instead of stemming the ruble's collapse.

"When central banks in both developed and emerging economies are slashing interest rates at emergency meetings, perhaps we should seriously consider the possibility of a cut in Russia," said Piotr Matys, a strategist at Rabobank in London.

Matys is the only economist out of 37 polled by Bloomberg to forecast a reduction on Friday and thinks 50 basis points is possible.

Russia needs oil prices of around $40 a barrel to balance its budget, and a central bank "risk scenario" published last year concluded that an average oil price of $25 a barrel would tip the economy into recession.

Annual inflation has been stuck below the central bank's 4% target for five months, but the central bank warned last week that it's likely to accelerate faster than expected following the ruble's slide. The currency had climbed about 1.8% to 79.56 versus the dollar by 12:25 a.m. in Moscow following a 6.7% plunge on Wednesday.

"Russia is different because it's an oil exporter and the history of financial crises has been well rehearsed here," said Ivan Tchakarov, an economist at Citigroup Inc. in Moscow. "This is how it always happens: oil prices and currency fall, inflation rises, financial panic ensues and they hike."


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