Russia’s central bank defied the global rate-cutting trend on Friday by holding rates steady, choosing to protect its battered currency despite the looming threat of a global economic slowdown as the coronavirus pandemic spreads.
The bank paused its easing cycle and held its benchmark rate at 6 per cent, fearful that a cut would exacerbate the 30 per cent fall in the rouble this year that has made the Russian currency one of the world’s worst performing.
But it warned that the Russian economy faced a “downturn of economic activity in the coming quarters” and announced a number of initiatives including a Rbs500bn ($6.3bn) bank lending facility with an interest rate of 4 per cent to offer loans to small and medium-sized businesses.
“The situation has changed dramatically, primarily in the global economy, in the global commodity and financial markets. Now events are developing according to a different scenario than our basic forecast suggested in early February,” governor Elvira Nabiullina said in a press conference following the rate announcement that underlined the lack of clarity over the bank’s best course of action.
“I would say that the board of directors today was non-standard . . . for the key rate, we considered three options: to lower, increase or leave unchanged,” she added.
Policymakers were caught in a bind between protecting the rouble and offering support to the economy by following the raft of central banks around the world that have cut rates this week in an effort to promote lending as the virus outbreak sparks national lockdowns, crashing markets and closing factories.
The decision to hold rates “made clear that the fall in the rouble . . . has spooked policymakers”, said William Jackson, chief emerging markets economist at Capital Economics.
The rouble reached a two-day high before the rate announcement, but weakened to 79.5 to the dollar after the central bank’s statement, down 19 per cent since the start of March.
The central bank this week said it would intervene in the currency markets to prop up the rouble for the first time in five years, and spent $98m on Tuesday alone as the rouble plunged towards a historic low.
“The rouble’s depreciation is a temporary pro-inflationary factor,” the central bank said on Friday. “It might prompt annual inflation to exceed the target level [of 4 per cent] this year . . . coupled with the impact of the temporary increase in current demand for a number of products and services, triggered by consumers’ drive to accumulate stocks [of goods].”
Future rate decisions would “take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets”, the bank said.
Moscow has said its $570bn in foreign reserves and $150bn national wealth fund are adequate for it to withstand a prolonged period of low oil prices, and would be liquidated to offset budget shortfalls.
“In our view, should the [rouble] rise above 80 on a sustainable basis, the [Central Bank of Russia] may seriously consider [rate] hikes,” said Ivan Tchakarov, analyst at Citi in Moscow. “This may very well happen in an environment of continuously falling oil prices, should the coronavirus shock gets entrenched.”
Russia’s predicament is partially self-inflicted: the Kremlin last week declined to participate in a Saudi Arabia-led push to reduce oil production that aimed to offset the fall in demand for crude caused by the coronavirus outbreak.
That decision ripped up the deal between the two major oil producers to cap production and sparked a price war that saw oil prices crash 30 per cent, pulling the rouble down with it.
Bipan Rai, North American head of currency strategy at CIBC, said that all currencies with links to global growth and commodity prices have been suffering, but most were “nowhere near as bad as the Russian rouble and Norwegian krone”.
Norway’s central bank on Friday cut interest rates by 0.75 percentage points to 0.25 per cent, its second cut in two weeks, as it said economic conditions had “continued to worsen”.
Source: Economy - ft.com
