In an unexpected move, the Russian Central Bank announced a special interest rate meeting, hinting at measures to prop up the continuously weakening Ruble this year.
On the morning of August 14, Eastern Time, the Russian Central Bank revealed it would hold an unscheduled meeting on Tuesday local time, with a decision on the key rate to be announced at 10:30 a.m. local time. This suggests the central bank's rate decision meeting, originally set for September 15, has been moved up by a month.
While the Russian Central Bank did not provide specifics on Monday, the sudden rate meeting is reminiscent of last month's unexpected action. On July 21, the bank unexpectedly raised interest rates by 100 basis points, pushing the benchmark rate to 8.50%, while the outside world had anticipated an increase to 8.0%.
That hike in July marked the bank's first increase since the escalation of the Russia-Ukraine conflict in February of the previous year. The bank also noted then, for the sake of stabilizing inflation around 4% in the following years, it might continue to increase the key rate in future meetings.
Following the central bank's announcement about Tuesday's meeting, the currency market responded swiftly. Investors expected a significant rate hike, causing the Ruble to rebound, erasing its intraday losses and pulling away from a nearly 17-month low reached earlier that Monday.
On that Monday, during the European stock trading hours, the USD/RUB exchange rate had surpassed 101.70, a new high since the onset of the Russia-Ukraine conflict in March of the previous year. However, during the early trading hours in the U.S., it plunged below 101.00, even reaching below 97.40 at one point, marking a more than 4% decline from its intraday high.
Since the start of the year, the Ruble has weakened by around 27% against the U.S. dollar, making it the third-worst performing emerging market currency. Analysts suggest the exchange rate has become a barometer for Russia's economy, reflecting reduced export revenues, isolation from Western financial markets, and recent tensions between the Russian government and its central bank.
Less than three weeks after last month's rate hike, the Russian Central Bank took steps to boost the Ruble. It announced last Wednesday that it would suspend foreign currency purchases in the domestic market until the end of the year, resuming based on the prevailing financial market conditions.
Several factors have pressured the Ruble, such as increased government spending, declining energy revenue, and Russians depositing funds in foreign accounts. Elvira Nabiullina, the head of the Russian Central Bank, has frequently mentioned that deteriorating foreign trade conditions are the main reasons for the Ruble's decline, although she ruled out interventions to support the exchange rate.
In a column published by TASS earlier on Monday, Maxim Oreshkin, Russian President Vladimir Putin's chief economic adviser, unusually pointed fingers at the central bank. He believed a strong Ruble was needed and policymakers had the necessary tools to normalize its value soon.
Oreshkin wrote that the root causes of the Ruble's devaluation and increased inflation are lax monetary policies. The central bank possesses the tools to normalize the situation in the near future.
Earlier on Monday, the Russian Central Bank reiterated that the current Ruble weakening did not present any financial stability risks, hinting again at potential rate hikes in upcoming meetings. The central bank noted that with increased government spending and rapid loan growth, there was an increase in import demand and a "significant decline" in export values.
Analysts generally believe that merely suspending currency purchases is too limited in scope to effectively support the Ruble.
JPMorgan recently commented that last week's suspension of currency purchases failed to stabilize the Ruble's exchange rate. The bank has raised its year-end interest rate forecast for the Russian Central Bank to 10%, up from its previous prediction of 9%.
Ian Melkumov, an independent economist in Moscow, anticipates a significant rate hike by the Russian Central Bank, similar to the increase to 20% shortly after the outbreak of the Russia-Ukraine conflict. He believes that even if the bank raises the rate to 15%, it could prevent the Ruble from devaluing, but it would come at a cost as the bank wouldn't want to harm the economy and businesses like it did the previous year.
