Ruble strengthens before central bank meeting

Ruble strengthens before central bank meeting

Russian Rouble Gains Momentum as Central Bank Considers Rate Hike

Moscow, August 15, 2022 – The Russian rouble saw a significant rebound on Tuesday, fueled by anticipation that the central bank would raise interest rates in response to the currency’s recent depreciation against the US dollar. The rouble had taken a nosedive past 101 per US dollar on Monday, prompting the Kremlin to call for stricter monetary policy. Investors are optimistic that an extraordinary policy meeting will result in a rate hike, boosting confidence in the currency and potentially stabilizing its value in the coming months.

The rouble’s recent performance has been anything but stable. As the conflict with Ukraine unfolded, the Russian currency witnessed a sharp decline, losing over 20% of its value against the US dollar. However, today’s upward momentum suggests a potential turnaround. At 0546 GMT, the rouble was up 1.6% against the US dollar, reaching 96.14 per dollar after falling dangerously close to 102 in intraday trading on Monday. Furthermore, it has gained 2% against the euro, trading at 104.92, and strengthened 1.8% versus the yuan, reaching 13.15. These positive movements are giving investors hope that the rouble can recover and regain stability.

To address the challenges faced by the rouble, Russia’s central bank has called for an extraordinary meeting to discuss the current state of affairs. At present, the country’s key interest rate stands at 8.5%, but speculation suggests that it may be increased to 12% in an effort to restore the rouble to a more favorable level against the US dollar, perhaps even below 90. Commenting on this, Sber Investments stated, “We believe the regulator may raise the key rate to 12%, which will help the rouble return to more reasonable fundamental levels in the coming months (below 90 to the dollar).”

This would not be the first time the central bank has taken such decisive action. In late February 2022, shortly after Russia’s invasion of Ukraine, the bank raised rates to a drastic 20% to counteract the immediate aftermath of the conflict. Since then, the bank has gradually lowered borrowing costs. However, rising inflation necessitated a 100-basis-point hike to 8.5% just last month. With an upcoming decision looming, the central bank has the opportunity to use its tools to stabilize the situation, as highlighted by President Vladimir Putin’s economic adviser, Maxim Oreshkin, who stated, “It is in the interests of the Russian economy to have a strong rouble.”

The rouble’s tumultuous journey reflects the political and economic challenges Russia has faced since the Ukraine conflict began. After hitting a record low of 120 against the US dollar a month after invading Ukraine, the currency made an impressive recovery, reaching a high not seen in over seven years. Measures such as capital controls and increased export revenues played a role in this rebound. President Putin has praised Russia’s $2 trillion economy for its resilience. However, the strain of engaging in the largest land war in Europe since World War Two, coupled with what the West considers the most severe sanctions in history, are taking their toll.

The rouble’s depreciation has had consequences for everyday Russians, as prices for basic goods have risen. This inflationary pressure comes at a crucial time, with a presidential election on the horizon in March 2024. On the other hand, a potential interest rate hike could prove challenging for borrowers, including companies and the government, as they grapple with financing military operations in Ukraine. As Russia navigates these complex dynamics, the outcome of the extraordinary policy meeting will undoubtedly play a crucial role in determining the rouble’s future trajectory.

Russian Rouble