MOSCOW—The Bank of Russia said Wednesday it had suspended daily
purchases of U.S. dollars for its reserves since Tuesday as the
ruble dropped to four-month lows, threatening to spur already
stubbornly high inflation.
The fresh ruble weakness, mostly driven by a slump in global oil
prices, seems set to scuttle hopes for big cuts to the central
bank's lending rates this year to revive the country's shrinking
economy. The bank has warned that inflationary risks could limit
the scope for monetary easing.
The central bank said it stopped buying foreign currency on the
domestic market on July 28, the day the ruble weakened beyond the
psychologically important levels of 60 against the dollar and 67
against the euro for the first time since March.
The decision "indicates that the central bank is looking to
strike the right balance (between) the desire to continue cutting
rates and the need to keep inflation under control," said Ivan
Tchakarov, chief economist at Citi in Moscow.
The ruble strengthened in response to news of the move, trading
at 59.5 midafternoon in Moscow.
After allowing the ruble to float in late 2014, the central bank
has carried out daily interventions of up to $200 million a day in
the currency market to bring its gold and foreign-exchange reserves
back to around $500 billion in the next three to five years. As of
July 17, the reserves stood at $358.2 billion.
The central bank said in an emailed comment that the suspension
of interventions was caused by elevated volatility in the currency
market and was in line with its earlier pledges to minimize impact
of buying foreign currency for reserves on the ruble exchange
rate.
Still, analysts at Sberbank CIB said the decision to halt
foreign currency purchases "risks confusing the market as to
whether the central bank has indicated USD/RUB 60.0 as the upper
band of its comfort zone." Bank of Russia came under fire late last
year after the ruble slipped wildly, briefly hitting 80 to the
dollar and sending panicked residents scurrying to exchange booths
and ATMs.
Inflation has been a weak spot for the central bank as the
annual pace of price growth has remained above 15% for several
months, far from the 4% target. At the same time, Western sanctions
and oil prices that have halved since a year ago have both sent the
commodity-dependent economy into recession for the first time since
2009. Government data this week showed that the economy was 4.2%
smaller in June compared with last year, still better than the 4.8%
reading for May, suggesting the economic decline could be bottoming
out.
This week the Bank of Russia is in the market spotlight as it
will have to balance inflation and growth risks at its rate-setting
meeting on July 31.
The majority of analysts predict that the central bank will cut
rates on Friday, though on a lesser scale than earlier this year.
So far in 2015, the central bank has slashed the key rate four
times, from 17% to 11.5%. This time, the central bank is widely
seen cutting the key rate by 50 basis points to 11%.
The suspension of interventions indicates that the central bank
"remains vigilant with respect to how the weaker currency may
translate into higher inflationary expectations," Mr. Tchakarov
said. "It makes it even more likely that the central bank would
feel more comfortable cutting rates on Friday."
The recent bout of weakness in the ruble, however, has raised
concerns that another rate cut would put extra pressure on the
battered currency and will only spur inflation further. Renaissance
Capital, which expects a rate cut this week, said the risks to its
interest-rate call are now skewed toward no change. Barclays also
said in a note to clients that the central bank is likely to pause
in July and will keep rates unchanged.
Write to Andrey Ostroukh at andrey.ostroukh@wsj.com
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