Article / 11 September 2015 at 7:30 GMT

Weak rouble keeps Russia's rates from the chop

Russia oil and gas expert
United Kingdom

  • Consensus is for Russia to keep its key rate at 11% today
  • Market volatility has taken a toll since rates were last cut in July
  • On August 25, the oil index was trading as low as $42.81/barrel
  • Consumer inflation is accelerating and looks to continue

Moscow





















Over troubled water: Russia's central bank is faced with the unenviable task of bridging the gap between a collapsing rouble, surging inflation and a global oil glut. Photo: iStock
 

By Nadia Kazakova

Russia's central bank rate decision will be announced, as usual, at 1300 Moscow time (1030 GMT) on Friday, September 11. The market consensus (as polled by www.rbc.ru) is almost unanimously for no change in the key rate, which was last cut by 0.5% (50 basis points) to 11% on July 31.

A wider Bloomberg poll shows a similar result: 32 out of 35 analysts forecast no change in the rate with only three predicting a cut.

Consensus forecast for the key rate decision on September 11 (%):
Source: www.rbc.ru

The central bank might have wished for a less eventful interlude between the two rate meetings. On July 15, the ICE Brent Index traded at $53.52/barrel and USDRUB stood at 58.99. The storm in global markets has taken its toll, however, with the oil index was trading as low as $42.81/b and USDRUB at 70.75 on August 25.

The drop in the rouble has been feeding through into higher consumer price inflation throughout August and early September. The downward trend in the CPI has been broken and the 12-month rolling inflation rate climbed from 15.3% in June to 15.8% in August. The reading in August would have been higher if not for a seasonal decline in fruit and vegetable prices.

Monthly and 12-month rolling consumer price inflation (%):
x
Source: www.gks.ru

There has not been any letup so far in September. The stats for the first seven days show that inflation has been accelerating, with its daily rate more than doubling compared with August. The rouble's depreciation is also likely to keep pushing inflation higher throughout September. Unless the rouble stabilises, it will be hard to break the upward inflationary trend.

The central bank of Russia has no control over external factors (such as the oil price, risk appetite, sanctions), which, in the long run, move the rouble. The best the bank can do in the short term is to keep rates steady and try to mitigate the worst of the rouble volatility (and its impact on inflation) by calibrating the short-term rouble liquidity available to the banking sector.

Elvira Nabiullina

Russian central bank governor Elvira Nabiullina, seen here meeting with president Putin, will likely be looking to close the "liquidity tap" at today's meeting. Photo: Wikimedia Commons


The central bank (as well as the Treasury) can use a few instruments to adjust rouble liquidity. They are various short-term loans, for example, that are given by the central bank against high-quality collateral (overnight, weekly, bi-weekly repo, lombard and intraday loans). 

The bulk of the money, however, is given through loans with lower quality (“non-market”) collateral. These short-term loans are unlikely to be used for longer-term lending by the banks, and so some of this money is bound to find its way to short-term trading, increasing market volatility. 

In response, the central bank has been closing the liquidity tap. Since the last rate decision on July 31, the amount of short-term liquidity has been noticeably reduced, by RUB 759 billion to RUB 4,195 billion as of September 10.

The short-term liquidity loans by the central bank and Treasury (billion roubles):
x
Source: www.cbr.ru

The rate decision today at 1330 Moscow time will be followed by a press conference from c central bank governor Elvira Nabiullina at 3pm. A live webcast should be available on the central bank's website found here

The Q&A session should give a bit of a feel for what the market is mostly concerned about (the upper “pain” level for USDRUB, talk about capital controls, the state of the Russian economy) as well as the regulator's current thinking on these topics.

— Edited by Gayle Bryant

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector. Read more of her views on social trading leader Saxo Bank's content platform, TradingFloor.com.

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