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16 Dec 2014
Currency crisis prompts aggressive policy response from CBR – BTMU
FXStreet (Barcelona) - Lee Hardman, Currency Analyst at Bank of Tokyo-Mitsubishi UFJ, notes that the Central Bank or Russia held an emergency policy meeting overnight and raised rates to 17.0% to limit the risks for devaluation and inflation.
Key Quotes
“The Central Bank of Russia held an emergency policy meeting overnight after which it announced that it has decided to raise its key policy rate by 6.5 percentage points to 17.0%. In the accompanying policy statement the Central Bank of Russia stated that “the decision was driven by the need to limit the risks of devaluation and inflation, which have recently significantly increased”.”
“The rouble has strengthened sharply at least initially in the European trading session in response to the CBR’s aggressive rate hike overnight highlighting that it is a more credible policy response to help stabilize the rouble.”
“Their main policy rate has now been set well above the rate of inflation generating a more attractive real policy rate. It is also reassuring that the Russian authorities are still implementing orthodox policies to stem the rouble’s decline.”
“However, if higher interest rates fail to stabilize the rouble it becomes more likely now that the Russian authorities will turn to unorthodox measures such as imposing capital controls although they are still seen as a last resort.”
“It remains to be seen whether today’s policy move will prove successful at helping to stabilize the rouble although it should have more success than other measures adopted so far. The rouble is likely to remain under fundamental selling pressure at least until the price of crude oil finds a new lower equilibrium.”
“The lack of encouraging signs that the Russia is willing to rebuild relations with the West will also keep the rouble under downward pressure. In these circumstances, there is still a material risk that the rouble will continue to decline despite today’s actions.”
Key Quotes
“The Central Bank of Russia held an emergency policy meeting overnight after which it announced that it has decided to raise its key policy rate by 6.5 percentage points to 17.0%. In the accompanying policy statement the Central Bank of Russia stated that “the decision was driven by the need to limit the risks of devaluation and inflation, which have recently significantly increased”.”
“The rouble has strengthened sharply at least initially in the European trading session in response to the CBR’s aggressive rate hike overnight highlighting that it is a more credible policy response to help stabilize the rouble.”
“Their main policy rate has now been set well above the rate of inflation generating a more attractive real policy rate. It is also reassuring that the Russian authorities are still implementing orthodox policies to stem the rouble’s decline.”
“However, if higher interest rates fail to stabilize the rouble it becomes more likely now that the Russian authorities will turn to unorthodox measures such as imposing capital controls although they are still seen as a last resort.”
“It remains to be seen whether today’s policy move will prove successful at helping to stabilize the rouble although it should have more success than other measures adopted so far. The rouble is likely to remain under fundamental selling pressure at least until the price of crude oil finds a new lower equilibrium.”
“The lack of encouraging signs that the Russia is willing to rebuild relations with the West will also keep the rouble under downward pressure. In these circumstances, there is still a material risk that the rouble will continue to decline despite today’s actions.”