Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Central Bank Will Keep Cutting Rates

VedomostiUlyukayev, right, speaking with Kudrin on Wednesday. Both officials promised not to introduce new capital controls.

The Central Bank will keep cutting interest rates as policy makers try to prevent speculative capital from flowing in and destabilizing the currency, First Deputy Chairman Alexei Ulyukayev said Wednesday.

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.

The bank cut the refinancing rate Tuesday to a record low of 9 percent in the ninth reduction since it started easing in April, as it tries to curb speculative gains in the ruble and ease credit flows. Demand for ruble assets has left Russian stocks overvalued, leading to a threat of overheating, Finance Minister Alexei Kudrin said Wednesday. The bank said in October that it would also use interest rates to manage the ruble.

Ulyukayev said Wednesday that 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 crisis has shown that the economy is “extremely vulnerable” to external events, Ulyukayev said.

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.

The government isn’t planning to restrict capital and will target “soft measures” to help stem the ruble’s appreciation, Kudrin said. Central Bank officials have already promised soft measures to curb speculative inflows to emulate steps already taken by Russia’s BRIC peers. Kudrin said Russia would not reintroduce direct capital controls, which it scrapped in 2006.

“We should be afraid of cheap money — I mean speculative capital inflows,” Kudrin said. “We, like many other markets, have received a large volume of short-term speculative money from the world markets. They have arrived, they are among us, and the index is inflated. It is overheated.”

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.

Russia, which has the fourth-highest benchmark interest rate in Europe after Ukraine, Iceland and Serbia, is the only BRIC nation still cutting rates.

Russia will require its lenders to have bigger capital buffers in future, Kudrin said. Capital requirements for banks should be raised to 1 billion rubles ($34.7 million), a move that the government hopes will lead to consolidation, Kudrin said. The number of banks will probably fall to about 500 from 1,100, he said.

(Reuters, Bloomberg)