Russia’s central bank last week switched the pattern of its foreign exchange interventions, in a move that analysts say should fend off speculators buying rubles on the cheap.
The bank began interventions whose volume is based on the state of the forex market, estimates of balance of payment data and the progress of federal budget implementation.
These will supplement its existing operations that limit the ruble’s volatility against the two-currency (euro and dollar) basket, the bank said in a press release. The move is part of the “shift to inflation targeting”, the bank said.
The first intervention, of several hundred million dollars, was completed on Wednesday, the central bank’s first deputy chairman, Aleksei Uliukaev, told Interfax news agency.
Analysts said that the bank was probably motivated by a desire to fend off speculative pressure. In early May, three big international banks – Deutsche, Goldman Sachs and Dresdner Kleinwort – urged the market to buy cheap rubles before the Russian authorities took measures to curb inflation.
“This is a positive move. We believe the central bank is attempting to discourage speculative inflows”, Olga Naydenova, analyst at Alfa Bank in Moscow, told Emerging Markets.
The move was “a sign that the bank is unlikely to resort to currency appreciation to control inflation: we believe this has become an ineffective tool.”
The central bank’s adjustment to forex intervention policy came against a background of unresolved debates on monetary policy – and specifically, on how to calm inflation on one hand and avoid a liquidity crisis on the other.
In recent months, most observers reckon that measures to maintain liquidity have prevailed, even though public statements by prime minister Vladimir Putin and others have focused on the inflation danger.
Larry Brainard, chief economist at Trusted Sources consultancy, writes in Emerging Markets today: “The policy dilemma is this: in the longer run, low inflation is essential for financial stability, but it is not clear how the Central Bank can get from here to there, especially in the context of today’s global financial crisis” (pages 10-11).
Finance minister Aleksei Kudrin pledged earlier this year to contain inflation at 8.5% - but last week the ministry of economic development and trade upgraded its inflation forecast for 2008 from 8-9.5% to 9-10%.
There is little support among senior Russian leaders for ruble appreciation as a means to combat inflation, and most economists agree. As for whether this week’s moves may signal possible ruble appreciation in future, observers are divided.
Deutsche Bank economist Yaroslav Lissovolik wrote in a research note that the main reason for the move is “to fend off speculative pressures, perhaps by allowing the ruble sometimes to weaken versus the dual currency basket”.
He added: “At this stage we are inclined to treat the Central Bank’s statements as favourable for ruble appreciation, in view of the reference to inflation targeting and the implications for exchange rate flexibility.”
Others disagree. Naydeynova at Alfa Bank, who sees ruble appreciation as unlikely, said: “In our view, the most likely anti-inflationary measure is an increase in obligatory reserves.”
Economists at Troika Dialog pointed out that money markets’ volatility has dropped in 2008, “which should help the Bank target money supply growth more effectively. This is a prerequisite for inflation targeting.”