Russia: Central Bank announces reduced intervention in foreign exchange market
September 8, 2014
The Central Bank announced changes to its foreign exchange policy on 18 August. The changes, which took effect immediately, are aimed at fostering more flexibility in the currency market within the framework of moving toward an inflation targeting regime. According to the Central Bank, the floating operational band—the range of the bi-currency basket adjusted to the amount of currency interventions—was adjusted from RUB 7 to RUB 9. In addition, the amount of interventions within the interval was reduced to zero from its previous commitment to purchase or sell rubles worth USD 300 million when the exchange rate reached the upper or lower bound of the intervention bands.
According to analysts, the Central Bank’s move fits well with its commitment to complete the transition to a freely-floating exchange rate regime by the end of this year. Moreover, analysts recognize that the Bank’s changes to the FX policy are also aimed at protecting languishing foreign exchange reserves, which totaled USD 469 billion at the end of July. The reserves were USD 41 billion short of the level observed at the end of 2013. Anna Bogdyukevich, economist at Unicredit Research, comments:
"We do not expect this decision to exert any pressure on the ruble because the bi-currency basket has been trading within the non-intervention zone for some time prior to these changes being introduced. However, we believe that the exchange rate volatility is likely to increase, especially amid unfavorable newsflow concerning developments in the Ukrainian crisis and uncertainty regarding the duration and severity of current and potential sanctions."
Slowing economic growth coupled with the escalation in hostilities at the end of August have caused the ruble to weaken sharply. On 2 September, the ruble hit a multi-year low against the U.S. dollar: the currency traded at RUB 37.5 per USD. This was 4.7% weaker than the level observed on the same day of the previous month and was 12.1% weaker than the level observed in the same month last year. In the following days, however, the ruble did gain some of the ground it had lost when news arose of a potential ceasefire in the eastern regions of Ukraine and that President Vladimir Putin had drafted a peace plan.
Author: Ricardo Aceves, Senior Economist