25 Nov 2009
Nov. 25 (Bloomberg) -- Russia's central bank will continue to cut interest rates as policy makers try to prevent speculative capital from destabilizing the currency, Bank Rossii First Deputy Chairman Alexei Ulyukayev said.Russia needs to keep cutting rates to stem the use of the ruble as a vehicle for the carry trade, and after the economic decline removed inflation risks, Ulyukayev said at a conference in Moscow today organized by Vedomosti.
The bank yesterday lowered the benchmark refinancing rate to a record low 9 percent in the ninth reduction since it started easing in April. Ulyukayev said today the bank will be "more active" in using currency transactions to steer the ruble within a "floating" corridor of 35 to 38 against a target basket of dollars and euros. The bank said in October it will also use interest rates to manage the currency.
The crisis has shown that the economy of the world's biggest energy exporter is "extremely vulnerable" to external events, Ulyukayev said.
The bank will also continue to cut interest rates as it sees "no inflationary risks" next year with a rate "much lower" than 9 percent, Ulyukayev said. Inflation slowed to an annual 9.7 percent in October, the lowest rate in two years.
Russian equity funds drew record amounts at the end of October, according to EPFR Global. The ruble is the second-best performer among emerging market currencies after the Chilean peso in the past three months, having gained 8.7 percent in the period, Bloomberg data show.
The ruble gained even after Russia bought foreign currency, raising reserves to $441.7 billion as of Nov. 13, compared with a low of $376.1 billion on March 13, central bank data show.
‘Overheating'
Finance Minister Alexei Kudrin said today that speculative capital has left Russian stocks overvalued, leading to a threat of "overheating."
The Micex Stick Index of Russia's 30 most liquid stocks has gained 116 percent this year. Interest in Russian assets has picked up following this year's 80 percent rise in the price of Urals crude. Energy products make up about 70 percent of Russia's export revenue.
Russia, which has the fourth-highest benchmark interest rate in Europe after Ukraine, Iceland and Serbia, is the only member of the four so-called BRIC nations still cutting rates.
"In terms of nominal interest rates Russia is still offering the highest yields in the emerging market space and in an environment where oil prices are remaining relatively well supported we think that the ruble will continue to be seen as an attractive way to position for global recovery," Manik Narain, an emerging markets strategist at Standard Chartered Bank Plc in London said yesterday.
