beyondbrics

The Russian central bank has put into effect its latest moves in the fight against inflation with some style.

After raising interest rates on Monday for the first time since 2008, the authorities late on Tuesday widened the trading band for the rouble – and were happy to see the currency rise sharply on Wednesday, by a full 1 per cent against a US dollar/euro basket.

As well as gaining some ground in the anti-inflation front, the central bank can claim another modest advance towards its aim of liberalising the rouble. Governor Sergei Ignatiev should be pleased with this week’s work.

Of course, the main driver for the strong rouble is the rising oil price, fuelled by the turmoil in the Middle East.

But it’s an ill wind…and Russian central bank has taken the opportunity to widen the trading band of the rouble against its dollar/euro basket by 0.5 roubles to a range of 32.45-37.45.

The rouble rose 1 per cent to a 9-month peak of 33.31 against the basket. But it still some 20 per cent off its 2008 peaks – so there is plenty of headroom in the market.

The bank’s first deputy chairman Alexei Ulyukayev said the band widening should help battle Russia’s surging inflation while increasing risks for speculators, and added that short-term risks point to further currency appreciation.

JP Morgan said in a note: “A wider, stronger corridor, rouble-bullish policymaker
rhetoric and high oil prices make continued rouble appreciation possible.”

In the past, the energy lobby has blocked rouble appreciation because it cut the value of  its dollar-denominated earnings.

But with ordinary Russians worried about rising prices and a presidential election in the pipeline, the priority for government officials is to curb inflation, which was running at an annual rate of 9.7 per cent last month

Renaissance Capital said in a note:

By widening the floating corridor, the CBR indicates that the current account surplus (on the back of an oil price above $110/bbl) is substantial enough to create inflationary risks, even in the absence of capital inflows. Previously, the huge surplus was balanced by $15-20bn in capital outflows in January-February, which is seasonally explained to a large extent.

The CBR is aware that once capital outflows slow, it will increase its presence in the FX market and will create inflationary risks which may realise in 2H11. Inflation in 2H11 seems to be the top priority for policymakers.

The higher oil price may also ease the authorities’ concerns about sluggish economic growth. With almost all the extra revenues flowing into the government’s coffers, the government will have plenty of money for supporting the poor, the civil service and the occasional cash-squeezed billionaire.

It’s not a recipe for balanced long-term growth but it should be enough to secure the 2012 election for the Kremlin candidate, be he Vladimir Putin or Dmitry Medvedev.