Falling off the meeting

The unexpected decision of the Bank of Russia to hold an unscheduled meeting of the Board of Directors at the key rate supported the ruble. As a result of Monday, the exchange rate of the dollar, rising to 101.75 rubles/$, closed at 97.66 rubles/$. Analysts do not rule out an increase in the key rate by 100-350 basis points. This step will have a positive impact on the ruble exchange rate, but against the backdrop of a currency deficit on the market, it may not be enough to reverse the exchange rate, which will require other support measures.

The play on the increase in the US currency at the beginning of the day on Monday, August 14, was spectacular, but fleeting. Already from the beginning of the main session, the dollar exchange rate was trading above the level of 100 rubles/$, and by 13:40 it reached 101.75 rubles/$, exceeding by 2.3 rubles. close of the previous day.

The situation changed dramatically after the Central Bank announced its decision to hold an extraordinary meeting of the Board of Directors on the key rate on Tuesday. Sales of the American currency have intensified.

At the end of the day, the dollar closed at 97.66 rubles/$, having lost 1.77 rubles during the day. The total trading volume exceeded 157 billion rubles, the second largest result this year.

The decision of the Bank of Russia to hold an unscheduled meeting turned out to be a complete surprise for the market, since last week the Deputy Chairman of the Central Bank, Alexei Zabotkin, stated that the regulator sees no risks to financial stability.

Apparently, the Bank of Russia was “helped” to see these risks. On Monday, Russian presidential aide Maxim Oreshkin named the regulator’s loose monetary policy (MP) as the main reason for the ruble’s weakness and accelerating inflation, and State Duma deputy Dmitry Kuznetsov asked Central Bank Governor Elvira Nabiullina to explain the reasons for the ruble’s depreciation and its consequences.

Market participants also doubted the declared stability. “An exchange rate above 100 rubles / $ is a crisis, if not for the financial system, then for the finances of citizens,” said a Kommersant source in the foreign exchange market. According to Mikhail Vasilyev, chief analyst at Sovcombank, the rapid weakening of the ruble raises devaluation and inflation expectations, undermines confidence in the national currency, which creates risks for financial stability.

Under the current conditions, the interviewed analysts do not rule out that on Tuesday the Central Bank will raise the key rate by 100–350 basis points (bp) to 9.5–12%. “The Central Bank will raise the rate by 200 bp. etc., but we do not rule out a more decisive step, taking into account the lag of the monetary policy,” says Andrey Melashchenko, economist for Russia and the CIS + at Renaissance Capital. An increase in the key rate will lead to an increase in the cost of loans, which will reduce consumer and investment demand, including for imports. “In addition, an increase in deposit rates and bond yields will increase the attractiveness of ruble savings and increase the demand for rubles,” notes Mikhail Vasiliev.

However, raising the key rate is a less efficient tool for stabilizing the ruble: it will show its effectiveness within six months, and during these months of adapting the transmission mechanism, the ruble may weaken more significantly, Vladimir Evstifeev, head of the analytical department of Zenit Bank, believes. Evgeny Koshelev, Director of the Market Research and Strategy Office at Rosbank, points out that the economy continued to produce a foreign trade surplus, but the main part of this surplus was received in rubles. According to the Central Bank, at the end of June, the share of the ruble in exports amounted to a maximum of 42.4%, which is 10 percentage points higher than a year earlier. “On the one hand, we have more convenient settlements in local currencies, but on the other hand, any type of outflow of foreign exchange liquidity (increased imports, capital outflow, etc.) withdraws previously accumulated balances,” notes Evgeny Koshelev

In this regard, market participants do not rule out that the Central Bank may take other support measures to maintain the ruble exchange rate. Vladimir Evstifeev refers to them the return of requirements for the mandatory sale of a part of foreign exchange earnings, the introduction of restrictions on capital outflows and direct foreign exchange interventions. In addition, the authorities may increase the sale of yuan from the reserves. “The return of the mandatory sale of exporters’ foreign exchange earnings will increase the supply of foreign currency on the Russian market. Strengthening restrictions on the outflow of capital will reduce the demand for foreign currency to withdraw capital abroad,” explains Mikhail Vasiliev.

Vitaly Gaidaev