Ruble Near 6-Month Low Narrows Options for Central Bank Support

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Can Russia Weather a Recession Coupled With Cheap Oil?

The ruble fell toward a six-month low amid renewed weakness in oil prices, threatening to end the Russian central bank’s series of interest-rate cuts aimed at reviving the economy.

The currency slid 0.5 percent to 65.3010 per dollar by 4:32 p.m. in Moscow, dropping for a third day. The ruble has lost a quarter of its value since reaching this year’s peak on May 18 as the central bank stepped up foreign-currency purchases to build reserves. Brent crude fell 0.1 percent to $49.15 a barrel on Monday, trading below $50 for the third day after entering a bear market last month.

Russia’s economy is heading for an estimated 3.6 percent contraction this year, hemmed in by lower oil prices and international sanctions tied to its role in the Ukraine conflict. Policy makers have reduced the benchmark interest rate five times by a total of 6 percentage points since making an emergency increase to 17 percent on Dec. 16.

“Some people could see the risk of the central bank being forced to raise rates instead of cutting them, although it’s hard to make a U-turn here,” Yury Tulinov, the head of research at Rosbank PJSC in Moscow, said in e-mailed comments. “I hope they at least refrain from further sizable rate cuts for now, or the ruble may suffer even more.”

The Bank of Russia reduced the rate by only 50 basis points to 11 percent at its latest meeting on July 31. It also dropped from the accompanying statement a pledge on readiness to lower rates further. Russia’s gross domestic product shrank 4.6 percent in the second quarter, after a 2.2 percent contraction in the first three months of the year.

Market Needs

“The oil price is really an exogenous factor that the central bank has no power on, so if anything it would probably be better to make a point by showing it is on the FX market to support the ruble, for example, through reintroducing the 12-month FX repos,” Simon Quijano-Evans, chief emerging-markets strategist at Commerzbank AG, said in e-mailed comments. “The market needs to see that the authorities are there.”

Bank of Russia stopped providing emergency 12-month dollar loans to banks in May as the ruble strengthened against the dollar. The same month, it started buying foreign currency on the market. Those purchases were halted on July 28.

Forward-rate agreements show traders betting on a 19 basis-point increase in borrowing costs in the next three months. Five-year government bonds fell for a second day, pushing the yield up eight basis points to 11.22 percent, showing the highest premium to the Bank of Russia’s key rate since January.

“It’s too early to talk about a hike yet,” Alexey Korolenko, money manager at UralSib Asset Management in Moscow, said by e-mail. “But in the easing cycle I’d make a pause at the next meeting.”

The Micex index of stocks fell for the first time in three days, declining 1 percent to 1,694.84.

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