In a clear sign of the helplessness which Russian authorities are currently exhibiting, the Russian ruble did not manage to benefit from a rather steep interest rate hike of 1.5% which the Bank of Russia announced at its monetary policy meeting today. Traders bought the ruble in anticipation of central bank action yesterday only to sell it again today in a typical “buy the rumor sell the fact” scenario.
The Moscow Exchange’s (MOEX) derivatives market has marked a new record high in traded volumes as the excessive FX market volatility has lead to increasing demand for FX futures and options as investors are rushing to buy protection to hedge their risks against the rapidly depreciating Russian ruble.
The increase of margin requirements on FX trading by MOEX could also have contributed to the liquidation of short positions, which only have been reestablished today.
The Russian central bank took action to deliver some relief to the rising anxiety in the country as the currency lost close to 17% since the beginning of September and over 28% since the start of the year. The helplessness of the central bank highlights that the decisions undertaken by the administration of President Putin are likely to bear rotten fruits for the average Alexandr (the Russian equivalent of the average Joe).
Inflation has been rampant as food prices have skyrocketed in the aftermath of the imports ban of European food products to the Russian market.
According to an announcement by MOEX, trading volume yesterday reached RUB 617 billion ($14.3 billion) with the average volume during the month totaling RUB 245 billion ($5.7 billion).
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Moscow Exchange’s Derivatives Market Managing Director, Roman Sulzhyk, stated, “Derivatives Market instruments, particularly FX futures and options, are especially relevant at the moment as they allow for hedging against FX risks.”
The central bank raised rates today to their highest since 2009, when the Bank of Russia fought against a depreciating Russian ruble which at the time was trading about 30% higher than current levels. Adding to this, that at the time Brent oil was trading at between $40 and $80 a barrel, the extent of pressure on the Russian ruble at present is substantial.
At the time the Bank of Russia raised interest rates to 10.5%, it will now need to go much further than that in order to reign in depreciation this time around.
According to estimates by the Russian central bank as of the 27 October, the annual consumer price (CPI) growth rate was 8.4%. Bank of Russia’s statement highlighted, “Inflation dynamics were mainly influenced by the Russian ruble’s depreciation and external trade restrictions imposed in August 2014.”
“The Bank of Russia will continue to take measures aimed at stabilizing inflation expectations and slowing down consumer prices growth to the target in the medium term. Should the external conditions improve, and inflation expectations show a stable downward trend, the Bank of Russia will be ready to start monetary policy easing,” the statement concluded.
Keeping in mind that the target inflation levels for the Russian central bank is 4%, it is way off at present and we expect it to act more vigorously soon, in order to defend the ailing Russian ruble.
The next meeting of the rate setting meeting of the Bank of Russia Board of Directors is set for December the 11th.