Ruble Recovery Meets Most Bullish Forecasts on Hawkish Policy

Russia's Central Bank Keeps Benchmark Rate Unchanged
  • Nabiullina says ruble's gains can't be called a trend
  • Russian currency is best-performer globally in past month

Russia’s ruble traded at the strongest level in three months as a spike in oil prices coincided with a statement from the central bank signaling its hawkish stance may prevail.

The currency advanced 0.9 percent to 67.5150 against the dollar by 4:26 p.m. in Moscow, after policy makers said they will keep their benchmark borrowing rate unchanged at 11 percent for a fifth meeting. That brought the ruble in line with the most bullish of about 40 forecasts for the end of the first quarter and came at the same time as a jump in the price of Brent, which together with natural gas contributes almost half of Russia’s budget revenue.

“It’s hard to disentangle the effects of oil and the central bank’s decision,” said Liza Ermolenko, a London-based analyst at Capital Economics Ltd. “While monetary policy can have a short-term impact on the ruble, in the medium to long term it will still be determined predominantly by oil prices.”

After sinking to its weakest level on record in January, the ruble is the best-performer globally in the past month as crude rallied from a 13-year low. Friday’s appreciation means the currency is trading almost 10 percent stronger than analysts’ second-quarter forecasts, which turned bearish at the start of the year when the ruble tumbled. Nomura, the currency’s top forecaster in 2015, sees it at 70 per dollar by the end of June.

No Trend

Speaking at a press conference after the meeting, central bank Governor Elvira Nabiullina said she isn’t convinced ruble’s recent gains amount to a strengthening trend.

“The factors currently influencing the exchange rate could soon prove to be quite volatile,” she said. “We don’t see a firm trend here.”

While one-month historical volatility for the currency has declined to near the lowest level since January as oil gained, options data predict its swings in the next three months will be the widest globally after Argentina’s peso.

Nabiullina is caught in a vise between inflation pressures that are best addressed through tighter monetary policy and the need to spur the economy out of recession, accomplished through stimulus and lower rates. She halted an easing cycle after July 31 as a sinking ruble increased inflation risks. At the last meeting in January, policy makers said they were weighing the possibility of rate increases.

‘Moderately Tight’

The ruble’s recovery had led bond traders to speculate the Bank of Russia would return to its easing cycle -- a shift that today Nabiullina signaled may be premature.

“To enable the accomplishment of inflation targets, the Bank of Russia may conduct its moderately tight monetary policy for a more prolonged time than previously planned,” the central bank said in today’s statement.

Climbing oil prices offset the impact of the hawkish tone of the statement on government bonds on Friday, with the yield on five-year notes declining nine basis points to 9.11 percent, headed for a 30 basis point reduction in the week.

Anton Tabakh, the chief economist at Moscow-based ratings company RusRatings, said Nabiullina’s determination is prompting him to review his forecast for an April easing.

“Before the statement I was 100 percent sure they would cut in April, but I’m no longer certain,” Tabakh said. “This is a really tough statement, you can sense the steel in Nabiullina’s voice."

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