The Central Bank of Russia has decided it’s once again safe to cut interest rates, which analysts said could curb a rally by the ruble.
On Friday, the CBR trimmed its seven-day repo rate, its main policy rate, by half a percentage point to 10.5%, unwinding the last of the emergency rate increases that sent interest rates to an all-time high of 17% in December 2014.
After falling oil prices CLN6, -3.18% and international sanctions sent Russia’s economy spiraling into recession in late 2014, growth finally looks set to resume. Russia’s economy still shrunk in the first quarter, but its 1.2% annualized decline was seen as an improvement over the 3.8% contraction in 2015.
Piotr Matys, an emerging-markets currency strategist at Rabobank, said he expects Russia to exit recession, which requires two straight quarters of growth, in the second half of this year.
By cutting rates, the CBR aims to protect Russia’s recovering economy by making it cheaper for businesses to borrow, while also making its currency less attractive to speculators—decreasing the likelihood of a destabilizing run-up in the ruble’s value, which would hurt Russian exporters.
Among core emerging-markets currencies, the Russian ruble has logged the second-best performance against the dollar so far this year, behind the Brazilian real. The greenback has shed more than 11% of its value against its Russian rival so far in 2016.
Though it strengthened in the immediate aftermath of the cut, the rubleUSDRUB, +1.7152% soon extended its decline against the dollar after the decision, with the greenback buying 64.79 rubles in recent trade, compared with 64.16 rubles late Thursday in New York. Falling oil prices weighed heavily on the Russian currency.
Its recent gains are a key reason why the central bank felt comfortable cutting rates, Matys said. When the price of oil spiraled lower, it took the ruble with it, stoking a massive run-up in inflation in Russia that further weighed on growth. But the ruble’s recovery has helped to alleviate those pressures by tamping down prices of imported goods.
After rising at an annualized rate of 17% in early 2015—the fastest pace in more than 10 years—consumer prices increased at an annualized rate of 7.3% in May.
“Inflation risks have sufficiently diminished to deliver a measured rate cut,” Matys said.
With higher oil prices helping to ensure that the currency won’t endure another all-out collapse, the central bank feels it can cut rates without stoking another sharp drop in its currency, Matys said. Lower interest rates decrease the relative return on assets held in a given currency, making them less attractive to foreign investors.
The central bank first began cutting rates last summer, but was forced to abandon its plans after the sharp devaluation of the Chinese yuan last August triggered a widespread selloff in emerging-markets assets and currencies.
Neil Shearing, chief emerging-markets economist at Capital Economics, said he expects the central bank to continue cutting rates, unless economic growth in China slows markedly, sparking another sustained drop in oil prices. Shearing sees Russia’s policy rate falling to 6% by mid-2017.
“The big risk here is China. Any signs of a more serious downturn in China could bring down oil prices and that would have a knock-on impact on the ruble,” Shearing said.
original source: http://www.marketwatch.com/story/the-russian-rubles-spectacular-rally-is-coming-to-an-end-2016-06-10