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Thus, the ruble managed to pare some of the losses suffered since the beginning of the pandemic (in early March, the rate was RUB66-67/$). A stronger ruble is an important factor for the inflation trend – the ruble’s appreciation slows import price growth and helps stabilize consumer inflation. Analysts see rising influence of other factors, for example, the deflationary effect coming from weak domestic demand.
BCS GM incorporated the latest dynamic in the exchange rate and the oil market. “We see the ruble averaging RUB70.3/$in 2020 (previously, we expected RUB73.4/$) and at RUB69.53/$by end-2020 (vs our earlier estimate of RUB72.04/$),” the bank said. “While we believe that inflationary pressure in Russia will gradually build up in 2H20, we lowered our end-2020 forecast from 5% to 4.2% y/y. In our view, this will allow the CBR to cut.”
CBR Governor Elvira Nabiullina announced at the end of May that the CBR would stick to the current FX sales procedure until the end of September, which means it will refrain from FX sales until then if the price of Urals remains above USD 25/bbl. The Governor also provided an assessment of the macroeconomic conditions: retail prices have likely fully adjusted to the FX shock and the front-loaded consumer demand, while economic activity has turned the corner after the contraction, which seems to be proving less deep than consensus had expected, as evidenced by the industrial production numbers and payment flows tracked by the CBR.
Nabiullina noted that the CBR would consider a 100bp key rate cut, from its current 5.5% level, among other potential options, and highlighted that the CBR did not at this point see a need to bring interest rates below expected inflation. Our baseline suggests 100bp cuts for this year to 4.5%, but we see those cuts being delivered in a more measured fashion: -50bp in June and another -50bp alongside revised projections in July. However the timing is a close call, given the fluidity of the data and the CBR's response to it.
The weighted average interest rate on unsecured overnight interbank ruble loans, or Ruonia (Ruble Overnight Index Average) is a key reference rate for Russian money markets.
The Ruonia rate, which has been calculated since 2010, was previously administered by market participants. On May 21, responsibility for administering the rate was transferred to the Central Bank of Russia. The CBR is now fully in charge of the methodology, calculation and publication of this benchmark rate. The change was driven by changes in international practice, the EU regulation, as well as the need for operational continuity.
The Ruonia rate is based on data provided to the CBR by the largest banks active in the interbank market. It is used as a benchmark in pricing of loans and bonds, and even is used in setting rate for certain finance ministry instruments. The CBR uses Ruonia rate as one of the indicators in assessing monetary policy transmission and money market liquidity.
Another fixing rate, which coexists with the Ruonia rate, is the traditional MosPrime (Moscow Prime Offered Rate), which is administered by the National Foreign Exchange Association. It is based on the ruble offer rates of eight major contributor banks.
71 RUSSIA Country Report July 2020 www.intellinews.com
