Central Bank Allows Ruble to Edge Upward

The Central Bank allowed the ruble to strengthen Wednesday for the second time in a month, and dealers said they thought it was not the last time the regulator would use its heavy weaponry to combat inflation.

The ruble was trading at 29.42 versus the dollar/euro basket, 0.3 percent stronger than 29.51 seen previously as the Central Bank's support level, before slightly easing later to 29.48.

"There is no Central Bank support, so the ruble has strengthened," said Alexander Karpov, from bank Zenit. "So far, nobody knows where the Central Bank's new support level is. Usually the Central Bank moves it by 10 kopeks."

The bank had supported the ruble within a corridor of 29.6 to 29.9 since August 2007 but widened it last month.

In June, it allowed the ruble to strengthen to 29.51, saying it had widened the corridor symmetrically in both directions, but market players said they expected the ruble to trade only near the stronger end of the corridor.

Ruble appreciation makes prices of imported goods cheaper, thus helping reduce inflation, but Russian export industries warn against excessive appreciation, which would make them less competitive on international markets.

The country's inflation, running at an annualized rate of 15 percent, has become the government's key headache.

On Wednesday, the State Statistics Service said consumer prices grew 0.2 percent in the first week of July, compared with 0.3 percent a year ago. Prices have already risen 9 percent this year through Monday.

It was, however, a rare week in 2008, when the consumer price index grew slower than in 2007. Some dealers said it might be linked to the ruble appreciation in June.

Government officials blame inflation on soaring global food prices, while other economists also point to large state spending ahead of national elections and high net private capital inflows.

Yevgeny Nadorshin, from investment bank Trust, said he believed the Central Bank had chosen the right time to allow the ruble to appreciate.

"It is a relatively quiet period. It is not an optimistic mood dominating the markets, and thereby foreign speculators, which the bank is fearing most, take a cautious approach toward the national currency," he said.

"The Central Bank's goal to have inflation below last year's level is still feasible. My calculations show that to bring inflation to below 11.9 percent, it will need to let the ruble appreciate further by no more than 1 percent," he said.

Last year, the bank let the ruble appreciate twice in July and at the beginning of August.