Russia Rate Surprise on Ruble Flagged at Capital, Morgan Stanley

Russia’s central bank may respond to the ruble weakening to a record low by raising its benchmark rate a full percentage point this week, according to to analysts at Capital Economics and Morgan Stanley.

Faced with a “collapse” in the ruble, policy makers may increase the key rate to 9 percent Oct. 31, Neil Shearing, chief emerging markets economist at Capital Economics in London, said today. While the half-point step forecast of most analysts is more likely, tightening by twice as much would be “preferable,” Jacob Nell and Alina Slyusarchuk, economists at Morgan Stanley, said in an e-mailed note today.

“The continued slide in the ruble over the past few weeks has raised the prospect that Russia is in the grip of a self-fulfilling currency crisis,” Shearing wrote in a report today. “The central bank needs to regain the initiative. A first step would be to raise interest rates by more than the market expects at this week’s board meeting.”

Policy makers led by Bank of Russia Governor Elvira Nabiullina are struggling to curb a ruble sell-off, ignited by sanctions the U.S. and its allies imposed on Russia for its role in the Ukrainian crisis. As falling oil prices bite into the energy revenue that underpins the country’s economy, the central bank has been forced to spend at least $18.5 billion this month to cushion the world’s worst currency drop since June.

Russia won’t “mindlessly burn up” reserves to defend its currency, President Vladimir Putin said Oct. 24.

The ruble has depreciated 16 percent against the dollar in the past three months, more than any of the more than 170 currencies tracked by Bloomberg. It weakened 0.4 percent to 42.4595 versus the greenback as of 6:23 p.m. in Moscow.

Next Move

Analysts are split on the central bank’s next move. An increase to 8.5 percent this week was predicted by a majority, 19 of 28 respondents, in a Bloomberg survey, while six forecast no change and one each predicted an increase to 8.25 percent, 8.75 percent and 9 percent.

The latter “is possible, given the track record of bold moves,” according to Nell and Slyusarchuk. That would help “strengthen the central bank’s credibility and reduce the risk of a disruptive ruble overshoot.”

The central bank, which plans to remove the ruble’s trading barriers and shift to formal inflation targeting next year, has raised the benchmark three times to 8 percent from 5.5 percent since March to slow consumer-price growth. Inflation accelerated to 8 percent from a year earlier in October, the fastest in three years, while policy makers target 4 percent price growth in the medium term.

‘Seriously’ Weigh

Policy makers may “seriously” weigh raising borrowing costs if inflation expectations remain high, First Deputy Governor Sergei Shvetsov said Oct. 22. The monetary authority isn’t planning to use foreign-exchange reserves as much as it did in 2008 and 2009 to help companies, he said.

The stockpile declined to $443.8 billion as of Oct. 17, the lowest since 2010, while net capital outflows reached about $85 billion in the nine months through September, compared with $61 billion in the whole of last year, the central bank data shows.

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