Bank of Russia Vows Hands Off Ruble, Warns on Rate Increase

  • Governor says oil prices may remain at low level for long time
  • Resumed oil drop puts additional pressure on ruble, inflation

The Bank of Russia, repeating that an interest-rate increase is possible, said it’s standing by its commitment to a free-floating exchange rate and will only intervene in the currency market to thwart risks to financial stability.

“If inflationary risks strengthen, if a negative scenario unfolds, we don’t rule out tightening,” Governor Elvira Nabiullina said Thursday at meeting with banks near Moscow. “Of course, a new wave of decline in oil prices is creating additional inflationary pressure.”

A selloff in crude, which pushed the ruble to record lows last month, has already prompted the Russian central bank to extend its rate pause to four meetings and warn that it may tighten monetary policy if inflation threats intensify. Policy makers are opting to sit out the turmoil even as Russia risks its longest recession in two decades and price growth decelerated last month to the slowest in more than a year.

“Inflation will be significantly higher on average this year as a consequence of the further depreciation of the ruble driven by the renewed fall in oil prices,” Kristin Lindow, senior vice president at Moody’s Investors Service, said in e-mailed comments. “The higher inflation will likely delay additional monetary-policy easing by the Bank of Russia for several more months.”

‘Complete Nonsense’

While the ruble has weakened more than 7 percent this year with oil, Nabiullina said authorities are considering no changes to managing the currency and called any reports to the contrary “complete nonsense.” The central bank, which hasn’t sold foreign currency since late 2014, has pledged to avoid interventions unless the ruble’s swings threaten financial stability.

Brent crude, used to price Russia’s main export blend, has weakened more than 15 percent in 2016 following three years of losses. The CBOE Crude Oil Volatility Index, which measures expectations of price swings, rose to the highest level since February 2009 on Thursday.

That’s stoking fluctuations in the ruble, whose one-month historical volatility is the highest globally, according to data compiled by Bloomberg.

Too Volatile

The Bank of Russia may intervene in the currency market to smooth moves in the ruble it deems a threat to financial stability, according to Dmitriy Tulin, Nabiullina’s first deputy in charge of monetary policy.

“We have no influence over the level of the exchange rate and aren’t able to do that,” Tulin told reporters in Moscow on Friday. “We can fight the volatility that’s caused by some technical factors related to market imperfections.”

The central bank is reviewing its oil forecast and assumes there’s a possibility prices will stay at a “rather low level for some long time,” according to Nabiullina.

The world’s largest energy exporter is considering spending cuts to contain a widening budget shortfall as the economy contracts and the price of crude trades near the lowest in 12 years. The Finance Ministry, which collects almost half of the annual budget revenue from commodity sales, denied reports on Wednesday that it’s discussing ways to weaken the ruble in order to increase the amount of local-currency revenue it gathers on exports.

Bad Expectations

The central bank in January left its key rate unchanged at 11 percent after pointing to elevated inflation expectations, which rose to the highest in a year last month. Trend inflation, a long-term measure of price growth, rose above the actual consumer-price index in January for the first time in two years, the Bank of Russia said Thursday.

Policy makers are still able to reach their medium-term inflation goal under the central bank’s base case, according to Nabiullina. The dimming outlook for oil means the Russian economy will need to adapt further to outside challenges, she said. The central bank is against using its international reserves to support the exchange rate, she said.

Elevated inflation expectations are complicating the central bank’s target of reducing consumer-price growth to 4 percent in 2017, its research and forecasting department said last week. Ruble weakness in December and January will add 1.3 percentage points to inflation in the first quarter, it estimates. Prices in January rose 9.8 percent from a year earlier, compared with a 12.9 percent gain in December.

“The effectiveness of the Bank of Russia’s monetary policy is significantly reduced due to the structural problems in the Russian economy,” Tulin told lawmakers Friday during a parliament hearing over steps needed to aid the economy. That decreases the price elasticity of demand and makes it easier for retailers to pass on their expenses to consumers, he said.

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