On Friday, the Russian rouble strengthened against the US dollar to reach a high of more than two weeks. This was after the Russian central bank decided to reduce its interest rate by almost 150 basis points, which meant that it was back to levels before the pandemic. The rate was back to 9.5% and some of the capital controls that had been imposed were also eased. According to the central bank, it would consider reducing the interest rate further this year, as inflation is coming down from the 20-year highs it had reached and there is also the possibility of an economic contraction.
Rouble Gains Under Pressure
There was a 3.5% rise in the Russian rouble by 1050 GMT against the US dollar, as it hit a value of 57.27. This is the strongest the currency has been since May 25th. The currency had also strengthened against the euro by almost 4.7% and had reached a two-week high. The rouble is likely to see some downward pressure with lower interest rates and it would also give some support to the prices of the treasury bonds.
However, the capital controls that Russia had imposed when it had sent its troops into Ukraine on February 24thhave helped in keeping the currency afloat. As a matter of fact, it has been the best performing currency of the year so far, primarily because of the controls that have been implemented. Most of the analysts had expected that Russia would reduce the interest rate by 100 basis points and it would come down to 10%.
The Russian central bank had been trying to make lending more affordable for people because of a slowdown in consumer demand and a halt in inflation. But, some of the analysts had predicted that the rate cut would be sharper and that is what happened. Elvira Nabiullina, the Governor of the Central Bank, will also speak.
Effects of the Interest Rate Cut
The decision of the central bank is not going to have much impact on the rouble rate. This is because of the capital flow curbs that are in place. But, analysts said that it is possible for the rouble to stop strengthening through a combination of several factors. These include imposing a ban on exporting companies for making sales in foreign currencies.
The Finance Ministry announced on Friday that export companies would no longer be required to convert their foreign exchange earnings. This is because the government is slowing easing off their capital controls, which have been credited with keeping the rouble stable. They certainly helped in preventing a dramatic slide in the currency, after about $300 billion of the currency reserves of the central bank were frozen by Western governments.
Before the measure was lifted, Russian firms had to sell 80% of their earnings, which had been reduced to 50%. There was a 4% boost in the RTS index in the stock market, which reached 1,261.2 points. Meanwhile, the MOEX index remained steady.
