Apparently desperate times call for desperate measures. The Central Bank of Russia hiked a key interest rate from 10.5% to 17% on Monday, justifying the decision over concerns about the ongoing currency depreciation and inflation risks.
A new Nataxis report highlighted that the Russian central bank increased the limit for the foreign exchange liquidity facility (28-day REPO) from $1.5 billion to $5 billion. As an overview, Nataxis notes: “In the absence of a political response to the current situation and in the context of sliding oil prices, all efforts from the central bank to reverse the free fall of ruble do not seem particularly fruitful. We would expect more FX interventions and markets control amid the deteriorating economic outlook.”
Russia: Stock markets and ruble crashing
Although the ruble initially bounced up as much as 10% on the news of the rate hike, both the ruble and the Moscow stock market ended up crashing. The stock market was down as much as 20$ and the ruble hit a low of 72 to the dollar. The Central Bank of Russia even suspended the trading on main Russian equity index futures (RTS) when the rout grew into a panic at one point.
Next steps for Russian Central Bank?
The Nataxis report points out that policy from the Russian central bank largely are closely linked to oil price dynamics and the foreign exchange markets. Some market rumors have already speculated about another increase to 20% in the months to come, but the current 17% level is already clearly damaging the economy and the availability of credit.
The authors of the report suggest “…the dangers of keeping such rate for too long we do not expect it to persist for more than 2-3 months which should already be enough to plunge the Russian economy in deeper recession than expected previously (we expect the GDP growth to stand at -3.0% in 2015 vs -1.0% previously).”
They also note that the fact that the largest Russian companies are shut out of foreign capital markets means difficulties in debt refinancing will arise in the near future. This will in turn put the investment projects of corporate sector at risk, and also means bank balance sheets will almost certainly see more private sector defaults.
Analysts at SocGen note:
The ruble plunged a breathtaking 9.3% against the USD yesterday, and more during afterhours trading, in a move that harkened back to the 1998 Russian crisis. Similarities with 1998 also included long lines in front of ATMs and bank branches as people tried to purchase foreign currencies, as well as the looming spectre of capital controls as the Russian authorities attempted to counter increasing capital flight. L