Rouble moves higher despite Russian rate cut

Russia’s central bank cut its key interest rate, citing the country’s continued emergence from a two-year recession — but the move failed to stop the rouble pushing higher on Friday.

The cut — by 0.5 per cent to 9.25 per cent — went further than the incremental 0.25 per cent drop the bank implemented last month, suggesting that the bank was confident of reaching its inflation targets but was concerned about the effect a strong rouble would have on Russia’s economy.

After initially weakening to Rbs57.17 to the dollar after the central bank’s announcement on Friday, the rouble subsequently traded 0.2 per cent higher on the session at Rbs56.88.

Oleg Kouzmin, chief Russia economist at investment bank Renaissance Capital, said the central bank’s decision was most likely linked with “fears inflation may be lower than the target at the end of the year, as well as of bubbles forming on the Russian financial asset market and the possibility that optimistic scenarios about oil prices will have to be rethought”.

Mr Kouzmin said the central bank might lower rates further than expected to below 8.5 per cent by the end of the year.

The bank said inflation, at 4.3 per cent, remained on track to hit central bank governor Elvira Nabiullina’s longstanding target of 4 per cent by year’s end, allowing for further gradual cuts in rates over the year.

Favourable economic conditions meant the bank expected gross domestic product to grow in the next three years even if oil prices — which strongly affect budget revenue and the value of the rouble — fall. The bank said it would retain its “moderately tight” monetary policy.

The rouble’s resurgence this year is beginning to put a spike in the Russian government’s budget plans, which assumed the currency would trade at Rbs60-Rbs65 to the dollar.

Two months of forex purchases by the central bank, as well as verbal interventions by ministers, have failed to halt its rise as investors seeking some of the largest returns in emerging markets flock to the Russian market.

On Tuesday, President Vladimir Putin said Russia was considering “special support measures” to weaken the currency and help Russia’s export industries, but would act “very carefully” and not abandon the free float Ms Nabiullina switched to amid a currency crisis when oil prices declined in late 2014.