Rouble outlook to balance global volatility, inflation

(RIA Novosti / Mikhail Kutuzov)
Economists say the Russian currency is likely to remain subdued through to the end of the year after weakening markedly amidst the global financial turmoil of recent weeks.

The Rouble decline by 5% against the currency basket over two weeks from 27.60 to the dollar to 29.44 on Friday ahead of a rebound to 28.85 on Monday August 15, with Central Bank Deputy Chairman, Sergei Shvetsov, confirming that the bank had intervened in currency markets to ensure stability, although not identifying the size of the operations.

Vladimir Tikhomirov, chief economist at Otkritie FC told RT Business that with considerable volatility remaining in global markets forecasting the movement of the rouble was problematic, but noted that provided the USD/EUR rate remained relatively steady then the Russian currency could be expected to rebound.

“In fact, it’s difficult to give any certain forecast, as there’s much uncertainty and fear concerning the debt problems in Europe and the U.S. But, generally speaking, if there’s no major economic collapse, I expect rouble to rebound back to around 27 roubles per dollar. We’ve seen rouble dropping in the wake of the ongoing market volatility, but there are no fundamental reasons for that, that’s why, I think, the rouble will go up again. That’s provided the euro-dollar ratio remains at the current level of 1.41. If the ratio is at 1.3 dollars per euro, then we’ll pay 29 roubles for a dollar.”

Alexander Morozov, Chief Economist (Russia and CIS) at HSBC, is more pessimistic, noting that after a rebound this week from the lows induced by global markets, the Russian currency can expect to ease, reflecting stronger imports through the first half of this year, easing inflationary pressure, and continued capital outflows.

“Basically, I expect rouble to weaken against both dollar and the dual currency basket and stop at the point of about 30.8 roubles per dollar and 36.9 roubles versus the basket by November-December – that’s following a short rebound that we are seeing now after a week of rouble losing ground. That’ll be due to a rapid growth of imports, coupled with a continuing capital outflows. And, I think, any rate above 28 roubles per dollar is above its fair price at present, as all basic macroeconomic indicators – the pace of economic growth, the inflation rate and the export – import dynamics – provide for a fair price of about 30 roubles against dollar and 36 roubles – versus a currency basket.”

A strengthening rouble, backed by a rising interest rate outlook to contain rebounding inflation spurred by food prices in the wake of 2010’s drought, saw imports grow by 48.6%, year on year, between January-May 2011, according to the Economic Development Ministry report. Otkritie’s Tikhomirov, believes easing inflationary pressures, particularly from food, may turn around later in the year, and force the Central Bank to lift rates, which could lift the rouble.

“The main factor driving the CBR’s decision will be the inflation rate. In august it stood at 8.5% and was showing a downward dynamics due to a seasonal factor and a low base effect. But in the second half of a year inflation traditionally goes up, as Russia starts to import vegetables, for example, from further locations, which means higher transportation costs and the volume of import itself starts growing. All this leads to higher food prices. And I expect inflation in Russia to have reached 8.8% by the end of this year. But going back to the issue of an interest rate, I think, in 4Q it becomes clear what’s the story with inflation, and, as I expect it to grow, think the CBR will rise the rate 50 basis points to 8.75%.”

HSBC’s Morozov, is forecasting inflation is likely to be higher than Tikhomirov, but believes non food items will be the key variable.

“I retain my forecast at 9.5% this year, but we still need to look what happens with the price for non food goods. And in 2012, I think, it’ll slow down to 7.5%. ”

Morozov told RT Business that he sees the Central Bank holding on any rate movements when it next meets, with a possibly quarter percent to be expected later in autumn, with Central Bank interventions in the currency market likely to be kept to a minimum.

“I think, at the next CBR’s meeting scheduled for September, the body will retain the refinancing rate as is, with a deposit rate likely to be lifted by about 25 basis points in November – December this year. But, generally speaking, I don’t expect any aggressive reaction from the Central Bank, maybe it’ll start selling dollars at some point to avoid devaluation expectations, but as I said, it won’t be on a large scale.”

­James Blake, Anastasia Kostomarova, RT