Russia halts ruble rally with rate cut that tops most forecasts

MOSCOW: Russia’s central bank has delivered its third interest-rate reduction in just over a month and says borrowing costs can fall further still, halting a rally in the ruble as it unwinds the financial defences in place since the invasion of Ukraine.

The Bank of Russia lowered its benchmark to 11% from 14% yesterday at an extraordinary meeting it announced only a day earlier.

All 23 economists surveyed by Bloomberg predicted a reduction, with most forecasting a cut of two percentage points.

The ruble maintained losses after the announcement, trading weaker for a second day.

After nine percentage points in easing since April, the central bank said it still “holds open the prospect” of more cuts at meetings ahead.

In a statement accompanying the decision, policymakers made little mention of the ruble beyond noting the exchange rate contributed to slower inflation.

“External conditions for the Russian economy are still challenging, considerably constraining economic activity,” they said. “Financial stability risks decreased somewhat, enabling a relaxation of some capital control measures.”

Encouraged by a faster-than-expected slowdown in inflation after shocks to demand, the decision shows the central bank’s determination to get in the way of the ruble’s blistering ascent even as the capital controls continue to handcuff the market.

With the latest rate cut, it is now reversed almost all the emergency monetary tightening after the invasion of Ukraine three months ago.

Despite the sweeping sanctions imposed on Russia, surging exports and capital controls have sapped demand for foreign exchange and sent the ruble soaring to the highest levels since 2018.

Efforts by the authorities to slow the gains, including the easing of key capital controls earlier this week, so far haven’t helped much.

Stringent restrictions remain in place. Since the invasion, capital controls have made it impossible to sell assets and repatriate the proceeds.

In anticipation of deeper monetary easing, the ruble weakened sharply on Wednesday after gaining for five straight trading sessions. It was down 2.6% against the dollar as of 10:54am in Moscow yesterday.

“I do not think that the decision of the central bank will help to weaken the ruble in the absence of a carry trade,” said Dmitry Kosmodemiyanskiy, an asset manager at Otkritie.

“Everyone sees the trade balance and only a madman would play against it.”

The central bank also wants to provide a shot in the arm to an economy that is on track for a sharp contraction.

With the collapse in consumer demand, weekly inflation is slowing after a run-up in prices because of a spate of panic-buying in the months immediately following the invasion.

“Further easing is likely in the months ahead. A soaring ruble and a sanctions-hit economy provide the urgency, while stable financial markets and fading price pressures are freeing policy makers to act,” said a Bloomberg economist.

President Vladimir Putin has touted the gains as a sign that the country has survived the unprecedented sanctions imposed by the United States and its allies to punish Moscow for its invasion of Ukraine.

But Russia’s oil and gas exports are mostly exempt from the penalties, sending billions of dollars and euros flowing into the country each week.