Automatic Adjustment of the Limits of the Currency Band will Result in More Frequent Changes

It is to be reminded that the Central Bank of Russia has carried out target interventions from May 2008, thus, smoothing imbalances between the supply and demand of the foreign currency on the domestic foreign exchange market due to the impact of fundamental factors. To the above factors, the Central Bank of Russia attributes the parameters of the foreign trade balance with the dynamics of global prices on energy carriers taken into account. Sharp fluctuations of the exchange rate of the ruble provoked by speculative expectations of economic agents are neutralized by the Central Bank of Russia at the expense of above-target currency interventions.

The decision of the Central Bank of Russia became a regular one in a complex of measures implemented by the regulator in 2013 and aimed at ensuring higher flexibility of the exchange rate formation mechanism. By abandoning target interventions, the regulating effect of the Central Bank of Russia will be limited to neutralization of only dramatic exchange rate surges which are not justified by fundamental factors. It is to be noted that in calculation of the accumulated value of interventions resulting in an automatic shift of the limits of the currency band only the excess of the net volume of the above-target interventions over the aggregate volume of target interventions is taken into account. So, automatic adjustment of the limits of the currency band with the Central Bank's decision taken into account will be carried out on the basis of the aggregate net volume of the above-target interventions which situation results in more frequent adjustments of the currency band. It is to be noted that only within the first work week of January the limits of the currency band were changed three times.

The dynamics of measures of the Central Bank of Russia can be assessed as a positive one as it will contribute to higher flexibility of the exchange rate formation. Due to a lack of the information on the rules of determination of target interventions, their quantitative value generates questions with experts.

Further weakening of the regulating effect of the Central Bank of Russia on the state of the domestic foreign exchange market will result both in growth in and importance of market factors in the process of the exchange rate formation with a simultaneous increase in the volatility of the exchange rate of the Russian ruble.

А.М. Kiyutsevskaya, Senior Researcher