Ruble Drops to August Low as Inflation Risk Postpones Rate Cut

  • `Illogical to cut now' amid consumer-price risk: Citigroup
  • Currency's next move `depends on oil,' RenCap analyst says

The ruble slumped to the lowest since August as oil’s slide below $40 per barrel prompted the central bank to keep interest rates on hold to avoid stoking inflation.

The currency fell for the first time in four days, dropping 1.7 percent to 70.3620 per dollar on Friday. The exchange rate has slipped 5.5 percent this month as Brent crude, which is used to price the country’s main export blend, reached the lowest level since 2008 and the government imposed trade sanctions on Turkey following that country’s downing of a Russian warplane over Syria.

While the weakening ruble is threatening to drive up inflation running at about four times the central bank’s target, the fact that it hasn’t fallen as fast as oil has led banks including ING Groep NV to argue this week that the currency is still too expensive. A price of a barrel of Brent in ruble terms dropped to the lowest since November 2010 on Friday, meaning that the government is getting less revenue at a time when it’s trying to fund a budget deficit.

The ruble’s next direction will “depend on oil,” said Oleg Kouzmin, a former central bank adviser who works as an economist at Renaissance Capital in Moscow. “We think a weaker currency and unfavorable news flow are responsible for higher inflation risks.”
The result, which Kouzmin called “rational,” was anticipated by 22 economists out of 36 surveyed by Bloomberg.

Rate Outlook

The bank was “right to keep the rate unchanged,” said Tatiana Orlova, a senior economist at the Royal Bank of Scotland Plc. in London. “Upward risks to inflation have risen conspicuously in the last couple of weeks.” A rate cut may not occur until March if there is a “significant acceleration in weekly inflation” through January, she said.

The decision will only be “marginally” supportive for the ruble as the market may have already priced in Friday’s decision to leaves the key rate at 11 percent for a third consecutive meeting,  said Ivan Tchakarov, an economist at Citigroup Inc. in Moscow.

Central bank Governor Elvira Nabiullina is struggling to enact policy to rein in inflation as the economy faces a 3.8 percent contraction this year, the worst since 2009. She reduced the key rate by 6 percentage points in 2015.

The Bank of Russia sees higher chances of oil prices will continue below $50 a barrel in 2016, Nabiullina said at a news conference in Moscow after the rate decision.

The yield on the five-year government bond was unchanged at 10.14 percent.

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