Ruble rebounds as Bank of Russia lets currency float

The Bank of Russia today abolished constraints on the ruble exchange rate, two months earlier than planned, prompting the currency to bounce back after a 13% drop against the dollar last week.

The central bank abandoned the trading band it used to manage the ruble after the currency reached 48.6 against the dollar on Friday – its lowest level to date and 45% less than on June 27.

"As a result of the implementation of [today's] decision, the ruble exchange rate will be determined by market factors," the Bank of Russia said in a statement. It added this "should enhance the efficiency" of monetary policy and "ensure price stability".

According to the central bank, allowing the ruble to float will "contribute to faster adjustment of the economy to changes [in] external conditions and enhance its resistance to negative shocks".

The Bank of Russia last Wednesday announced it would limit foreign exchange interventions to $350 million per day, after spending around $30 billion of its foreign reserves since early October to defend the currency.

Today's decision to scrap the trading band altogether was originally slated for January 1, when the Bank of Russia officialy moves to an inflation-targeting framework.

Moreover, the Bank of Russia now expects inflation to stay higher for longer. The central bank released an edited version of its guidelines on monetary policy for 2015–17 today, with new projections.

In Elvira Nabiullina's foreword, she says "consumer price growth will decline to 4% in 2017 with no significant slowdown of the economy". In her first ‘draft' the governor had said 4% inflation was "possible" in 2016. This section has been removed.

Observers gave a cautious assessment of the decision to remove the currency band. "We consider this step as only marginally negative for the ruble," said Oleg Kouzmin, an economist at Renaissance Capital in Moscow, in a note. "Effectively, the CBR abandoned the floating band last Wednesday."

According to Kouzmin, the Bank of Russia sold around $1.1 billion under the "open-range" framework, which lasted only three days.

Neil Shearing, chief emerging markets economist at Capital Economics in London, said the "decision to move to a free float appears to have helped stabilise the currency", which stood at 45.6 at the time of writing, a 2.5% gain on the day.

However, Shearing warned "renewed sharp falls" could leave small and mid-tier banks vulnerable to deposit withdrawal. "There are relatively few parallels between the 1998 ruble crisis and the present crisis, but one point in common is that some of the greatest vulnerabilities to a weaker currency lie in the banking sector," Shearing said in a note.

He said another plunge in the ruble would hit banks by pushing up the local currency value of their foreign liabilities. Shearing also noted foreign currency loans in Russia has increased both in absolute terms and as a share of GDP since 2008. "At present, foreign currency loans total $180 billion," he noted.

According to the central bank, today's decision "does not provide for complete abandonment of foreign exchange interventions", which may still be used to fend off financial stability threats. It has yet to define what would constitute such a threat.