Citi and JP Morgan on the Russian central bank rate hike to 17%
Comments from CitiFX and JP Morgan on the Russioa central bank move to hike to 17%
Bolding is mine
- Many market participants are looking at Russia’s hike from 10.5% to 17.0% and saying “wow”.
- However, speaking with one of our senior RUB traders, the move is likely not aggressive enough for the medium-term. “Hiking the key rate to 17.0% is not enough to get a hold of a currency that can drop 10% in one day,” he says. “On top of that, the FX repo size needs to be much larger than it is at the moment…however, the hike might give RUB a few days of breathing space.”
And, from JP Morgan:
- The rate hike occurred after today’s 10% depreciation of the RUB despite attempts by the CBR to intervene earlier in the day. The decision was aimed at “limiting substantially increased ruble depreciation risks and inflation risks” according to the CBR. This emergency move suggests to us that household deposit dollarisation had increased significantly (official October data had already suggested dollarisation re-accelerated again).
- Tonight’s large rate hike should in the short term help to slow retail dollarisation demand. However rate hikes do little to help the underlying demand for USD from corporates and banks who continue to front load their demand in order to apy their FX debt payments further down the line. With limited access to USD funding markets and oil having yet to find its bottom, the perceptions of local banks and corps on RUB continues to be negative, fuelling this hoarding behavior.
- In this context, there is a real possibility that even such a significant rate hike may not be enough in the medium run to stem RUB depreciation.
- The central bank in our view needs to announce a package of measures alongside rate hikes which also aim to lam local fears of USD scarcity. This will most likely involve making available a sizeable amount of FX reserves (we have suggested around USD100bn in our piece) through a combination of deposits in state banks and the CBR’s existing repo facility. The CBR however continue to be unwilling to commit their FX reserves, with their focus still primarily concentrated on defending the sovereign balance sheet. As part of a package of measures, the CBE may also look to cap local bank open FX position limit down from the current 20% of capital as well as raise FX RRRs to help stem deposit dollarisation. Further pressure can also be put on corporates to convert their FX proceeds faster.
- Bottom line: expect the market to react positively to the rate hike in the short run, but further measures are needed from the CBR for us to turn more bullish on RUB in the medium run, particularly in the absence of improved geopolitical risks and higher oil prices.
Comments via ZeroHedge