Ruble Turns Weak As Bank Of Russia Cuts Interest Rate

Ruble Turns Weak As Bank Of Russia Cuts Interest Rate
June 17, 2019


Russia’s central bank, in accordance with its previous outlook, lowered the benchmark interest rate and suggested a further decrease in the future amid easing inflation and softer economic growth. The latest 25 basis point rate cut was the first since a similar rate cut was announced in March 2018.

The Board of Directors, headed by Governor Elvira Nabiullina, decided to trim the benchmark interest rate by 25 basis points to 7.50%. Notably, the key interest rate was left unchanged during the past three monetary policy meetings. Ironically, in December 2018, the central bank announced a rate hike of 25 basis points. Similarly, in September 2018, the Bank of Russia resorted to a rate hike, the first of its kind since 2014.

The bank highlighted that anticipations are high despite a slowdown in inflation. The central bank also stated that short-term risks in favor of a sudden rise in inflation have faded in comparison to March. On the relationship between the ruble and inflation, Nabiullina said: “The ruble’s strengthening since the beginning of the year made an additional contribution to inflation slowdown.”

The bank estimates inflation to have marginally declined to 5% in June, from 5.1% in the earlier month. The central bank anticipates growth to stay below forecast in the first of half of 2019.

Considering the scenario mentioned above, the Bank of Russia slashed the FY19 annual inflation outlook to 4.7% to 5.2%, from 4.2% to 4.7% projected earlier.

The forecast was trimmed as the transfer of VAT hike to prices is finished and the comparatively beneficial external circumstances and medium domestic demand have been maintained. The bank is still expecting annual inflation to stay around 4%.

On the possibility of further rate cuts, the central bank said: “If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of a further key rate reduction at one of the upcoming Board of Directors’ meetings and a transition to neutral monetary policy until mid-2020.”

Furthermore, the Bank of Russia believes that the change in the direction of the benchmark rate in the US and other developed economies further minimizes capital outflow risk.

The bank said, “The revision of the interest rate paths by the US Fed and other central banks in advanced economies in 2019 H1 reduces the risks of persistent capital outflows from emerging markets.”

The central bank also slashed its FY19 GDP growth outlook to 1.0-1.5%, from 1.2-1.7%. The bank anticipates an improvement in the growth momentum in the upcoming years due to the implementation of various domestic projects and achieves 2-3% GDP growth in 2021.

Dmitry Dolgin, ING economist, opined that the Bank of Russia has reverted to monetary easing strategy with this rate cut and could slash the benchmark rate further by 50-100 basis points over a period of one year.

Dolgin said, “We now see a high likelihood of a couple of cuts in July and September. The longer-term path appears less certain, given recent indications of an easing in budget policy from 2020.”

The rate cut is expected to keep the ruble weak in the days to come.

The historical price chart indicates that the USD/RUB pair continues to enjoy support at 64.15. The next resistance is expected at 66.60. Furthermore, the stochastic oscillator is making new highs. As a result, we are expecting the USD/RUB pair to remain bullish in the short-term.

RUR - technical analysis - 17th June 2019

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Janine is our editor for related stock market news. Andrew and Janine will be focusing on providing the latest trends and where the next hit could be

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