When in doubt, do nothing. It might be the best piece of advice for the Central Bank of Russia for its forthcoming Board meeting tomorrow. There is fever pitch speculation in the press about what the Central Bank might do to stop the seemingly unstoppable slide of the ruble.
On year, the ruble has slid from 31.92 against the dollar to close at 42.46 Wednesday. Since July 11, when the plunge really set in, it has fallen just shy of 25%.
There is a reasonable expectation that the Central Bank will increase its key rate from 8% to 8.5%, but possibly to as high as 10%. It would be in line with the announced policy of using interest rates to target inflation, which is picking up against the backdrop of sanctions and the weaker ruble.
There is some talk that it might lighten its support for the ruble, rbc.ru reported. The Central Bank might change its policy on the bicurrency corridor. It could, say, move its limits by 10 kopecks after spending $350 million on FX interventions (rather than 5 kopecks currently).
It would effectively allow the bank to save around 50% of the dollars that it uses for supporting the ruble under the current policy. From October 1-28, the Central Bank spent over $21 billion to allow for a gradual decline in the ruble value.
Table. Central Bank's official FX interventions and Bi-currency basket/ruble rate
There is speculation that the Central Bank might even decide to abandon the bicurrency corridor altogether and allow the free float of the ruble after its meeting on October 31.
It would save the currency reserves and might allow for a swift – rather than step by step – adjustment to the ruble exchange rate. It also might send the ruble into a free fall, with few players willing to take the risk by calling the ruble floor.
There might be several reasons why the Central Bank should do little in the current climate.
Shoppers on Moscow's busy Tverskaya street will have half an ear on the Central Bank of Russia's policy meeting tomorrow as the ruble slide continues. Photo: Thinkstock
Less is more
First, the Central Bank must have more data than an average market participant, and presumably it should have enough information to figure out what drives the ruble at the moment. Whether it is continuous unwinding of leveraged positions taken by various banks, bulk buying of dollars for future debt repayments, barefaced speculations or all of the above.
It means that the Central Bank is capable of calibrating its response, depending on the information it has. So far, the response appears measured, in line with its stated policies and targets. Any deviation might panic the market and, worse, the population and do little to stabilise the ruble.
Secondly, the media reports suggest that exporters might be hoarding their dollars. They prefer to borrow in rubles to make payments (such as salaries) rather than sell export revenues. They might be saving up for future debt repayments.
It is also possible that they believe that ruble would plunge even further as soon as the Central Bank allows the free float on January 1, 2015.
At some point, however, the exporters should accumulate enough dollars for their future needs. Predictable and cool-headed policies of the Central Bank might calm their nerves.
Thirdly, there seems to be little demand for the Central Bank's emergency dollars, provided via its repo facility. Just over $200 million was borrowed out of $1.5 billion offered by the Bank.
The banks do not appear too desperate for the dollar liquidity if they found the 28-day facility at 2.4% annual interest rate too expensive.
Idee fixe
The Central Bank is not short of advisors when it comes to its ruble policy.
The former Minister of Finance Alexei Kudrin believes that the ruble should be let free now and make interventions much lesspredictable to fend off the speculators.
On the other side of the spectrum, there is advise from one of the Presidential economic advisers Sergei Glazyev. He wants the ruble rate to be fixed for 2-3 years at a certain level. The exact rate is not important, what is important is the sense of stability, asquoted by ria.ru.
Analysts at Sberbank's Centre for Macroeconomic Research have gone and calculated the consequences of such a move, Vedomosti reported.
Unsurprisingly, the fixed exchange rate would need to be paired with control over the foreign currency movements in and out, and inside of the country (also one of Glazyev's ideas). It would inevitably lead to grey market rates and would require additional injections of cash by the Central Bank (to replace withdrawn in panic deposits), among other negative consequences.
The Central Bank's Board meeting on Friday and its results (announced 1.30 pm Moscow time) will be most eagerly awaited. No news – dramatic that is – might be the best news for now.
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