Russian central bank steps up the pace
Today’s interest rate cut is larger than expected but likely to have limited impact on the strength of the rouble.
28 April 2017
In a surprise move, the Russian central bank cut interest rates by 50 basis points (bps) instead of the smaller 25 bps cut expected by the market.
However, this seems not to signal a deeper cycle; in a statement the bank said its assessment of the overall potential for easing is unchanged, suggesting it has simply brought cuts forward.
Cut supported by lower inflation
There was a suggestion that the bank’s deeper-than-expected cut is a response to Russian President Putin’s comments earlier this week that the government was looking for ways to weaken the exchange rate.
Currency strength is unhelpful for exporters and fiscal revenues from oil, but does assist with hitting an inflation target of 4%.
CPI (the consumer price index) seems to be well on its way to that target, currently at 4.3%, which has given the central bank confidence to cut more aggressively in support of growth.
Central bank still independent
We do not buy into the idea that the bank’s independence has been compromised by government exchange rate targets. If the concern is that investors seeking carry1 are driving rouble strength, and the market already expects rates to drop to 8.5% by year end, a compromised central bank would indicate a lower end point for rates rather than just frontloading cuts.
In any event, the cut has done little to drive investors out of the rouble, which is somewhat stronger following the move.
Limited impact on currency strength
Our own expectation for rates this year remains unchanged at 8.5% by year-end. Given the low yield environment which persists globally, it seems unlikely that the central bank would be able to reduce rouble carry sufficiently to significantly weaken the currency.
The main risks to this view would be a much more aggressive Federal Reserve, which would narrow the rate differential and strengthen the dollar, or a collapse in the oil price, though this would presumably deliver the rouble weakness central government desires.
1. A carry trade is a strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return.↩
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.