Friday, 15 June 2012 15:05
MOSCOW: Russia's central bank surprised the market on Friday by cutting rates for currency swap deals to enhance rouble liquidity and curb money market volatility, while leaving its key interest rates unchanged as expected.
Russia's economic performance is being damaged by the worsening global economy, which knocked down oil prices to below $100 per barrel while Russia's 2012 budget is built on an assumption of an average oil price of $115.
The debt crisis in Europe has also prompted investors to cut exposure to riskier emerging assets such as Russia's shares and bonds. But the bank is also wary of rising prices as it moves toward and inflation targetting policy in the future.
The refinancing rate, the cost of collateral-free overnight loans for banks, was left at 8 percent, while the fixed one-day repo rate, a de-facto ceiling for the money market rates, was kept at 6.25 percent.
The overnight deposit rate, which is the return from placing funds at the central bank's accounts, remained at 4 percent, serving as a floor for interbank rates.
"The decision was taken on the back of assessment of inflationary risks and economic growth prospects, taking into account an increased uncertainty over external economic developments," the central bank said in a statement.
While keeping key rates steady, the central bank said it will lower rates on dollar-rouble overnight swap deals to 6.5 pct from 8.0 pct for the rouble part, and to zero from 0.25 percent for the dollar part, effective from June 18.
"The cut in the rouble rate in currency swap deals will expand lenders' ability to raise rouble liquidity from Bank of Russia, which should curb volatility in interbank rates and boost the efficiency of monetary policy transmission," the central bank said.
The central bank is moving towards switching to inflation targeting policy by boosting importance of its interest rate mechanism while allowing the rouble greater flexibility, which means the currency can move either way more freely to absorb external shocks for the economy.
"The cut in swap rates were a surprise for the market. The swaps were not the main liquidity tool as the rate of 8 percent was too high for the market," said Alexei Pogorelov, economist at Credit Suisse in Moscow.
"This is more evidence that rates but not the rouble are of key importance for the central bank. They ready to live with higher rouble volatility but they prefer to have control over rates," he said.
The rouble firmed 12 percent versus the dollar in the first three months of 2012 but then fell rapidly, losing 15.5 percent in the next three months.
"The central bank wants to ease pressure on the currency market. The cut in swap rates is a positive signal which means that the central bank sticks to its line of cutting forex interventions and enabling other instruments," said Natalia Orlova, chief economist at Alfa Bank.
Market players had widely expected that the central bank will stick to a wait-and-see stance for the coming months, balancing downside risks to economic growth and the risks of rising inflation.
The central bank underscored in the statement on Friday that inflationary risks are set to rise in the medium term after utility tariffs are raised as planned in July and the positive effect from low food prices almost evaporates.
Inflationary risks, however, will not prompt the central bank to increase interest rates as it may hit already slowing industrial output growth and curb lending activity.
The central bank, which has kept monetary policy unchanged this year after gradually cutting lending rates and raising deposit rates in 2011, will next meet on rate in the fist half of July.
"Next month the central bank will likely leave rates unchanged but may provide a clearer assessment of inflationary risks," said Pogorelov at Credit Suisse.
A Reuters poll of analysts and economists showed in late May that the central bank may keep its key rates unchanged well into 2013.
Copyright Reuters, 2012