/ world today news/ The categorical step taken by the Central Bank to stop the fall of the ruble led to an unexpected reaction of the Russian currency. The ruble exchange rate, instead of strengthening, began to weaken again. Why does it keep swinging in different directions, and also when and at what level will the ruble finally stabilize?
At an extraordinary meeting on Tuesday, the Central Bank raised its key interest rate from 8.5% to 12%. This turned out to be higher than expected, but compared to the rise to 20% in March 2022, it is admittedly a less drastic step.
The ruble’s reaction was somewhat surprising. On Monday, on verbal interventions, the ruble’s fall stopped and even retraced its losses, retreating from 101 to the dollar to 96, immediately after the Central Bank promised to raise the interest rate. On Tuesday morning, it managed to get even stronger, but immediately after the announcement of a rate hike to 12% at 10:30 Moscow time, the ruble began to weaken again. But on Tuesday evening, the Russian currency sharply returned to growth and gained about two rubles against the dollar.
The central bank said nothing in its morning announcement about whether further interest rate hikes are possible in the future. This is seen as a possibility that the increase is not expected. However, already in the middle of the day, the Central Bank issued an additional press release that indicated the possibility of an interest rate increase in the future.
Why does the exchange rate of the ruble move so sharply and unpredictably? Will a sharp increase in the prime rate help increase its stability? Can additional measures be introduced to support the ruble – for example, restrictions on foreign exchange receipts?
“The dollar’s reversal on Tuesday after the announcement of an interest rate hike to 12% may mean that the market is reflecting expectations of tighter measures from the Central Bank, and not just in terms of rate hikes.” Many expected additional restrictions on the movement of capital or obligations for exporters to sell foreign exchange gains on the stock exchange for a faster inflow of foreign currency into the country’s economy,” explains analyst Vladimir Chernov, the “swing” of the ruble.
How does raising interest rates affect the ruble exchange rate? The action is indirect by slowing inflation. A high prime rate makes loans more expensive, which leads to a decline in lending to the economy and further down the chain to a reduction in consumer demand and a slowdown in inflation. In addition, due to low demand, import consumption is falling, while Russian export earnings are expected to continue to grow in the second half of the year. Such a change in the ratio of exports and imports leads to a strengthening of the ruble.
The question, however, is whether this scenario will actually come true. “I believe that no further increase in the base rate should be expected just yet. However, everything will depend on the dynamics of inflation and filling the treasury with money. If everything continues to go according to plan, there may even be a small rate cut by October. And already at the end of November, we can see 95-96 rubles per dollar, which is “comfortable” for the Ministry of Finance,” says analyst Artyom Deev.
Analyst Igor Rapokhin also believes that the Central Bank will continue to maintain the interest rate at 12% in the coming months.
“Most likely, the ruble will soon stabilize in the corridor of 95-100 rubles per dollar, but by the end of the year it will return to 85 rubles per dollar, as the supply of foreign currency by exporters may increase due to the growth in Russian exports “, writes the expert. However, he does not rule out further increases in the exchange rate in the event of increased volatility on the foreign exchange market.
“Given the strong increase in the base rate, the pair may stabilize in the 90-100 range for the foreseeable future. Otherwise, the Central Bank still has room to maneuver when tightening currency restrictions,” says analyst Yaroslav Kabakov.
“If the dynamics of the ruble and inflation normalize, it may not be necessary to raise the base rate until the end of the year. But if these factors cannot be brought under control, then a further increase in the main interest rate until the crisis by 20% per year is likely, “does not exclude the head of the analytical department of Zenit bank Vladimir Evstifeev.
Meanwhile, Vladimir Chernov is betting that a single rate hike may not be enough to significantly boost the ruble’s value. Therefore, he expects the next increase in refinancing rates at the next meeting, which is scheduled for September.
“By this time, we also expect an increase in the income of Russian exporting companies against the background of rising global energy prices, an increase in the value of the US dollar (income in rubles will increase) and a reduction in the discount of the Russian export mark of oil Urals to the reference variety “Brent” to 14% against 17.5%. This will lead to large volumes of currency conversion on the exchange for payment of taxes, that is, to an increase in its supply, which, together with an increase in exchange rates, may lead to a decrease in the value of the US dollar to 90-95 rubles by the end of September. says Chernov.
However, for an even stronger strengthening of the ruble, the expert believes, it will be necessary to further increase the surplus on the current account of Russia’s balance of payments (that is, exports must significantly exceed imports).
“This is possible only with a noticeable or even multiple increase in export earnings and a decrease in imports, or through coercive measures for exporters, such as an obligation to sell certain volumes of foreign exchange earnings on the exchange. In this case, we can expect a strengthening of the Russian ruble to 80 per dollar as early as the third quarter of 2023,” says Chernov.
In fact, the ruble’s sharp rise on Tuesday night could have come on the back of Bloomberg reports that Russia may partially resume the mandatory sale of export earnings. This, according to agency sources, was discussed at a meeting between the government and exporters on Monday. It is true that no agreements have been reached, but there could be another meeting later this week.
An increase in the prime rate will generally affect the lending and deposit markets.
“Loan interest rates will rise, but gradually and by a smaller amount than the prime rate, as the general situation in the credit market will also influence banks’ decisions. Deposits may repeat the trajectory of the prime rate and soon reach the 10% mark,” notes Yaroslav Kabakov.
“The last time the prime rate rose by just 1%, deposits showed growth in the first week. Given the sharp increase in the prime rate to 12%, the market will react even faster. I believe that in the next few days we can see how the banks raise interest rates on deposits and deposits,” says Deev.
An interest rate hike could slow the growth of the Russian economy. However, the current growth of the economy is less important for the Central Bank, as the adaptation to the changed conditions is faster and the GDP forecasts are raised regularly, concludes Evstifeev.
Translation: V. Sergeev
Subscribe to our YouTube channel:
and for our Telegram channel:
Share on your profiles, with friends, in groups and on pages. In this way, we will overcome the limitations, and people will be able to reach the alternative point of view on the events!?
#predict #strengthening #ruble
