Russia rate hike on cards as rouble falls

Jonathan Boyd
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On Friday, the Russian currency hit new historic lows against the US dollar. Technically, the CBR will have to intervene only when the ruble falls close to the RUB39/$ level, but before doing so, we think the bank will first opt to hike its interest rates again, possibly even as early as this week.

  • Ruble weakness mostly on a major rise in geopolitical risk:

o   Ukraine leaders claim that thousands of Russian troops are fighting in south-eastern Ukraine, a claim rejected by Russian officials

o   In response, Western nations have started to discuss the introduction of new sanctions against Russia

  • Other reasons for the ruble’s weakness include:

o   Softer crude oil prices with Urals blend balancing at $100/bbl mark

o   Seasonality – demand for RUB falls after tax payment season ends

  • CBR unwillingness to spend FX reserves – in line with the announced shift to RUB free-float – has added to the ruble’s woes

 

Vladimir Tikhomirov is chief economist at BCS Financial Group, the largest broker of securities on the Moscow Exchange.

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