 Crude Falling Faster Than Ruble Another Reason to Hold Rates
Bloomberg - 7/28/2015 4:57:06 PM
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The ruble’s relative resilience in the face of oil’s decline is adding to reasons why the Bank of Russia may take a pause on rate cuts this week as the currency’s pent-up weakness makes it vulnerable to lower borrowing costs.
While the ruble has dropped almost 15 percent since May 6, Brent crude, the benchmark for Russia’s biggest export, is down about 23 percent since touching a six-month high that day. That disparity sent the price of oil in local-currency terms to below 3,192 rubles a barrel on Friday, the lowest level in more than two months.Concern that a weaker currency will stoke inflation has led banks including Credit Suisse Group AG, BCS Financial Group and Uralsib Capital to predict policy makers led by Elvira Nabiullina might leave its key rate unchanged on July 31. A cut would add to a string of reductions begun at the start of the year that have largely reversed an emergency increase in December that halted the ruble’s slide.“This is one of the indicators that everyone is looking at and the signal it gives so far is unequivocal -- the ruble has potential to weaken even with a stable oil price,” said Dmitry Polevoy, the chief Russia economist at ING Bank Eurasia AO in Moscow, who expects a half-point reduction. “Risks of a smaller cut will increase along with the decline in Brent in rubles.”The ruble sank 1.2 percent to 60.3810 against the dollar at 11:17 a.m. in Moscow, the weakest since March 20, as Brent crude fell 1.9 percent, extending the bear market it entered yesterday.
Faster InflationThe central bank has lowered its benchmark rate to 11.5 percent since raising it by 6.5 points to 17 percent in December. Borrowing costs are coming down as oil rebounded from a six-year low and a cease-fire in Ukraine reduced the likelihood of further sanctions after Russian companies and banks were cut off from Western financial markets.The median forecast in a Bloomberg survey is for a 50 basis-point reduction on Friday. That would be the smallest cut since policy makers began cutting in January.Annual inflation slowed to 15.3 percent last month after reaching a 13-year high of 16.9 percent in March. Still, weekly consumer-price data indicate it may have accelerated again this month, Deutsche Bank AG analysts Yaroslav Lissovolik and Artem Zaigrin said last week from Moscow.“Unless we see Brent declines stopping, we’ll need to continue betting on ruble weakness,” said Ivan Tchakarov, an economist at Citigroup Inc. in Moscow. “We have a 50 basis-point cut forecast, but the risk is that they take a break this month. The Bank of Russia might fear that the spill-overs from the ruble to CPI will resume.”
Budget Benefit
While a weaker ruble is of concern to the central bank, which has inflation as its main remit, the Finance Ministry benefits from a decline as it increases the value of dollar-based oil and gas sales. The Bank of Russia shifted to inflation targeting as it abandoned the corridor used to manage currency swings and allowed the ruble to trade freely in November.The budget is based on an oil price of about 3,000 rubles a barrel, 6.4 percent below today’s level.“I think the rates decision will be a litmus test of the central bank priorities,” said Tatiana Orlova, the chief Russia economist for Royal Bank of Scotland Group Plc in London. “With the oil price falling, ruble depreciation is favorable for the budget.”
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