By Andrei Skvarsky.
The Russian central bank’s raise of the key rate to 17% from 10.5% on December 16 comes as early and stark proof of a forecast last week by Philip Uglow, chief economist at Deutsche Boerse research firm MNI Indicators, who said the regulator would further tighten its monetary policy but argued this would do more harm than good to Russia’s deeply ailing economy.
An increasingly rigorous monetary policy would cause “additional pain to an economy on the brink of collapse”, a statement from MNI Indicators quoted Uglow as saying.
Uglow’s conclusion is in tune with comments by Marshall Gittler, head of global foreign exchange strategy at Cyprus-based financial trader IronFX.
“The hike in rates is meant to make holding RUB more attractive and thereby stop the depreciation,” Gittler says in a research piece.
“This strategy is more successful when the problem is foreign speculators borrowing a currency to short it. In Russia’s case, when domestic capital flight is the problem, the rise in rates might only make things worse by spreading the pain to domestic borrowers and causing the economy to contract. That will make stocks, real estate and other RUB-denominated assets less attractive,” he says.
“A bottom to oil prices and some resolution of the tensions with the West over Ukraine are necessary before capital will be attracted back into the country, in my view. Unfortunately, both those targets remain far away,” Gittler says.
The rate rise, the largest since the collapse of the Russian bond market in 1998, “shocked the markets”, he says.
In fact, Uglow’s prediction began to be proved right the day after it was published as Russia’s central bank raised the key rate to 10.5% from 9.5%.
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