The Central Bank of Russia Promotes the Role of Market Factors in the Process of Formation of the Exchange Rate

It is to be reminded that on May 22 for the first time after dramatic growth in currency interventions in the beginning of the year the volume of currency interventions carried out within the internal floating operating band was reduced by $100m. It is to be noted that other parameters of the exchange rate policy remained unchanged.

A month later, on June 17, the Central Bank of Russia declared about regular reduction by another $100m of the value of currency interventions carried out within the internal floating operating band. In addition to that, the length of the band within which the Central Bank of Russia does not carry out currency interventions aimed at smoothing volatility of the exchange rate of the ruble was extended to Rb 5.1 against the limit of Rb 3.1 which was in effect from October 7, 2013. Expansion of the band within which the regulator does not interfere in the exchange rate processes will result in growth in the role of market factors in the process of formation of the exchange rate even despite the fact that the length of the floating operating band of admissible fluctuations of the ruble value of the bi-currency basket amounts as before to Rb 7.

A similar effect will be produced by a decision of the Central Bank of Russia to reduce the value of the accumulated interventions which result in a 5 kopecks shift in the limits of the operating band to $1,000m against $1,500m set on March 3, 2014.

So, beating off a speculative attack on the Russian ruble and calming down the currency market the Central Bank of Russia renewed the process of raising flexibility of formation of the exchange rate which process is carried out within the frameworks of a switchover to inflation targeting. The actions of the regulator in the beginning of the year confirmed its readiness to support the Russian ruble and stability of the currency market, including the process of a switchover to inflation targeting. In addition to the above, despite numerous statements of the management of the Central Bank of Russia and after a completion of a switchover to inflation targeting the regulator plans to use currency interventions to secure financial stability which situation is not in conflict with the global practice of inflation targeting.

It is to be noted that the decision which was made earlier by the Central Bank of Russia to preserve the key interest rate at the level of 7.5% per annum and the Russian Central Bank's readiness to raise it with preservation of inflation risks and risks of targets being overrun by the inflation rate in the mid-term prospect despite slowdown of Russian economic growth explicitly identifies emphases in the monetary policy carried out by the regulator. In our view, the regulator's efforts to secure reduction of growth rates of consumer prices to the target levels in the mid-term prospect are justified and contribute to stabilization of the macroeconomic situation in the Russian Federation.

Pavel Trunin, PhD (Economics), Director of the Center for Macroeconomics and Finance,
Anna Kiyutsevskaya, PhD, Senior Researcher