July 26 (Bloomberg) -- Russia’s surprise interest rate increase paves the way for policy makers to widen the band in which the currency trades and reduces the need to intervene, according to Goldman Sachs Group Inc.
The ruble has tumbled almost 4 percent against the dollar in the past month, the worst performance among 24 emerging-market currencies tracked by Bloomberg, after President Vladimir Putin’s annexation of Crimea spurred violence along the border with Ukraine. Bank Rossii boosted the one-week auction rate to 8 percent from 7.5 percent yesterday and may keep raising borrowing costs as currency weakness spurs inflation, according to a central bank statement.
The decision gives the bank room to make its exchange-rate policy more flexible as it moves towards a free-floating rate by year-end, according to New York-based Goldman Sachs. Enabling the ruble to strengthen will aid the central bank in its fight against price increases.
The surprise rate change makes it likely that the central bank “will proceed with further steps towards introduction of currency flexibility in the short term, with a decision to reduce the cumulative interventions needed to shift the intervention corridor, for example, likely as early as next week,” economists led by Clemens Grafe at Goldman Sachs in Moscow wrote in a note yesterday.
The central bank widened the corridor within which it will not intervene to 5.1 rubles, up from 3.1 rubles last month. It is required to buy or sell dollars to keep the ruble inside that range. It aims to abolish the band by year-end.
Russia spent $30.7 billion between Feb. 28 and May 8 to stem the ruble’s decline. Since then, it hasn’t sold dollars to support its currency. The country’s foreign reserves fell $39 billion to $472 billion in June, according to central bank data.
Consumer prices grew 7.8 percent from a year earlier in June, the most since August 2011. Inflation slowed on an annual basis to 7.5 percent as of July 21, the central bank said, adding that it will probably decelerate to a range of 6 percent to 6.5 percent by year-end.
The ruble slipped 0.5 percent to 35.1435 per dollar yesterday, extending its decline this year to 6.5 percent.
Russia’s policy makers are aiming to let the ruble decline because a weaker currency will increase the government’s revenue from energy exports, according to Ian Hague, who helps manage $1.1 billion including Russian stocks as the founding partner of New York-based Firebird Management.
“We expect the ruble to depreciate,” Hague said in a phone interview yesterday. “They are just plugging the holes.”
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