LONDON: Pressure is building on Russia’s central bank to support the rouble via a big rise in interest rates at this week’s policy meeting, as money markets price in sharply higher funding costs in the coming months.
The bank, which so far has been powerless to stem the rouble’s slide, meets tomorrow and analysts predict a 100 basis-point rise in the key lending rate, taking it to 10.5 percent.
Three-month forward rate agreements (FRAs), that allow traders to lock in existing market interest rates for six months, have jumped to 16.5 percent — up 1.5 percentage points from the end of last week and 400 bps higher than end-November levels.
What that means is that rouble deposit rates starting three months from now and lasting six months will rise to 16.5 percent — seven percentage points above current official lending rates. Official rates have been raised by 400 bps already this year.
“There is intense market pressure on the central bank to hike rates this week and any shortfall will lead to significant volatility across Russian assets,” said Bernd Berg, director for EM strategy at Societe Generale. “You see significant panic in the rates markets. The central bank must come in and address the panic with a combination of higher rates and tighter liquidity.”
Indeed, signs are authorities will also squeeze money market liquidity to support the rouble. Turkey adopted such a strategy last year, determining interest rates almost daily by controlling the amount of domestic currency available to banks.
“There’s a change in strategy at the central bank, which is moving away from intervention to liquidity tightening similar to what Turkey deployed. To that extent it makes the main policy rate somewhat less important,” UBS strategist Manik Narain said.
The picture is similar in Nigeria, where overnight rates have spiked after the central bank drained liquidity and raised interest rates.Reuters
MOSCOW: Russia’s central bank said yesterday that it had spent $4.5bn last week to prop up the rouble, which has plunged over falling oil prices. The currency lost almost a quarter of its value in November, and the trend has continued in December, with the rouble dragged down by the falling oil price and the ongoing Ukraine crisis. At around 0900 GMT, the rouble was trading at 54.23 to the dollar and 67.05 to the euro.
The Bank of Russia said that in interventions to support the rouble last week it spent $700m on Monday, $1.9bn on Wednesday and another $1.9bn on Friday. AFP
