Posted on Friday, 1st July 2011 by Charlotte W
Russian Central Bank is shifting focus to inflation battle
Ample liquidity has been keeping rouble rates low since early-2010. Currently, the month-end tax payments are tightening the liquidity in the rouble markets, but we also see it as a long-term trend. Inflation targeting is moving up in the priorities of the Russian Central Bank and there remains little reason to keep liquidity as plentiful as it has been during the past two years.
Thus far, the CBR policy has concentrated on supporting growth and keeping the rouble exchange rate under control. However, as important elections are approaching, the central bank is likely to concentrate more on keeping prices in check, as inflation is extremely unpopular in Russia. As credit growth seems to be robust and economic recovery stable, the CBR is in good position to gradually tighten monetary policy. CBR rate hikes have a limited effect on market rates as long as liquidity is excessive and we expect policymakers to loosen their grip in currency markets as well as continue to dry out the excess liquidity from rouble markets.
Tighter liquidity is likely to have a significant impact on most rates. Short-term money market rates are expected to rise, but we expect a significant increase in cross-currency swap curve as well. Cross-currency basis has been heavily negative, as Russian players have had plenty of roubles, but shortage of foreign currencies. In addition to this, it makes little sense to see swap rates clearly below government bond yields. Thus, we expect normalisation of the market conditions to lift swap rates during the coming months.
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Tags: Rates
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