Russia Widens RUB Trading Band, Signaling Comfort With Further Strength

By Win Thin

Russia central bank First Deputy Chairman Ulyukayev confirmed that it has widened the so-called “floating corridor” for the ruble basket to 32.45-37.45 vs. 32.95-36.95.  The band is now 5 rubles wide, and continues a slow and steady process of liberalizing the ruble exchange rate regime.  Back in October 2010, it eliminated the longer-term 26-41 band for the ruble basket in place since January 2009 in order to increase flexibility of the exchange rate and also widened the width of the “floating corridor” to 4 rubles from 3 previously.  The floating corridor has been in place since November 2009 and was originally 35-38 but the central bank has gradually moved that lower.  Back in April 2010, central bank Chairman Ignatiev said that it may come “very close” to a ruble free float within 12-18 months, so the trend towards liberalization is set to continue this year.

Russia is one of the few in EM to openly embrace a stronger currency, and is doing so in order to help limit inflation.  CPI rose 9.6% y/y in January, and Ulyukayev pledged today to keep inflation below 10% this year.  Note that the central bank hiked the refi rate 25 bp to 8% last week.  More hikes are expected, and we stress that this is the way that monetary policy should be run.  Hike interest rates, get a stronger currency.  Both will work to limit inflation and it’s a natural process that many in EM are mistakenly trying to avoid.  Ruble basket is now approaching the 2010 low around 33.40 and further gains are likely, especially with oil prices remaining high.  After that 2010 low, there are not any big chart points due to the sharp and relentless RUB sell off seen in 2008-2009.  Next retracement target from that 2008-2009 move is around 32. 

Russian interest rates versus CPI

Russian foreign reserves

Russian GDP growth

Russian Current Account

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