The Situation in Financial Markets

The situation in the foreign exchange market was rather tense since the beginning of the year. However, the underlying reasons changed during this time.

January 2014 was highlighted by foreign investors’ withdrawal from the assets of emerging market economies which was caused by the actions of the US monetary authorities and a general slowdown of economic growth in these countries. A surge of volatility was observed in a number of them but then the situation stabilised. Russia would likely follow the similar scenario but, unfortunately, a political factor interfered.

Investors were extremely nervous about the reports of growing political tensions in Ukraine the climax of which was on Monday, the 3rd of March.

In the morning of this day we made two decisions aimed at creating conditions to stabilise the situation.

Firstly, we raised the Bank of Russia key rate, at which we provide the bulk of liquidity to the banking sector, by 1.5 percentage points to 7% p.a.

Secondly, we decided to daily set the parameters of our interventions in the forex market based on the assessment of the current situation.

On Monday, we increased more than 4-fold the amount of accumulated interventions necessary to produce a shift in the dual currency basket’s band to US$1.5 billion. On the whole, we sold slightly over US$11 billion on Monday.

This helped restrain the panic and support the ruble’s stability.

Already by the evening, the situation in the forex market came back to normal. As a result, the ruble depreciated against major currencies by approximately 1% at the end of the day.

On Tuesday, we sold much less – about US$300 million, thus reducing the sales volume 36 times, and the ruble rate practically compensated for the Monday’s fall.

Moreover, taking into account the situation in the forex market, the Ministry of Finance announced termination of purchases of foreign currency to the Reserve Fund due to the growing forex market volatility.

The stock market saw a far more considerable reduction in prices (by about 11%) on Monday. Though the next day the prices went up offsetting nearly a half of the fall. However, the Russian stock market is not deep enough and more susceptible to fluctuations. A certain downward trend is observed in this market today.

We do not see fundamental reasons for the ruble’s depreciation. The pressure on it is now caused by external factors. The current assessments demonstrate that the Russian currency is underestimated, first of all considering the current account surplus. Thus, preliminary balance-of-trade data show that its surplus exceeds the figure of January-February last year by 11%. Obviously, the recent weakness of the ruble had its say.

Nevertheless, only positive dynamics of Russian main economic indicators – higher rates of economic growth, investment increase and capital outflow reduction – may contribute to sustainable long-term appreciation of the ruble.

Further. There are concerns as to how the current depreciation of the ruble will influence inflation. According to our estimates, considering the measures taken, we could reach the announced inflation target of 5% by the end of the year. Although the inflation background remains high: in January inflation stood at 6.1% on an annualised basis and in February – at 6.2% (the accumulated inflation since the start of the year stood at 1.3%, in January – 0.6%, and in February – 0.7%).

The decisions taken with regard to changing the scale of Bank of Russia involvement in the forex market by no means alter our principal stance of transiting to the inflation targeting regime. We will further increase the exchange rate flexibility. But, as we have stated earlier, we will conduct foreign exchange interventions on a necessary scale to maintain the financial stability, since it is our primary goal and responsibility. Precisely this approach we have taken lately.

We consider our decision to raise the key rate as a temporary one and it may entail certain costs related to the impact on economic growth. We will watch the situation and pursue our monetary policy respectively.

On the whole, there are signs of the situation normalisation, but the Bank of Russia pays close attention to its development. We have a wide range of instruments and the sufficient amount of international reserves to ensure stability in the financial market.

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