Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 14 Sep 2023 by Evgeny Gavrilenkov

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The ruble remains volatile as messages coming from different sources contradict each other. On the one hand, CBR officials last week directly indicated that it could hike the key rate again. The latter was a hawkish signal and caused some appreciation of the currency. On the other hand, top managers of the largest Russian banks this week said that there was no necessity to move the rate higher. After that, the ruble lost almost 2% in one day. A high level of uncertainty keeps investors nervous, which translates into high volatility. Besides that, market participants don’t rule out that some restrictions on capital flows could be announced on Friday. We think that the likelihood of this scenario is not very high, but if it happens, it may lead to higher disproportions on the FX market. The direct communication from CBR indicated that the fixed-income market incorrectly perceives the current period of an elevated interest rate. Note that after the previous two radical hikes in December 2014 and February 2022, it took 42-46 days for the regulator to start cutting. Many investors suggested that this time the situation is more or less similar. However, the CBR sees more pro-inflationary risks, than threats to financial stability. Hence, the regulator is ready to keep the key rate at a relatively high level for a longer time frame. After this “explanation,” the market started to price in a 50-200 bps hike this Friday. We believe there is no need to hike the rate right now as the disinflationary effect from a kind of stabilization of the ruble, which stopped steadily depreciating, is to be seen in several months. However, the CBR can move the rate once again as the effect is ...