Rubles Rally Poised to Hurt Economic Growth, Policy Makers Sees Aggressive Cuts in Rates

Russia is racing to contain a rally in the rouble and is poised to cute rates as the currency’s rally is acting as a threat to the economy.

The biggest currency appreciation globally was initially touted by the Kremlin as a sign the nation had weathered sanctions over its invasion of Ukraine. But now the gains are giving the government pause, as they bite into exporter competitiveness and budget revenue on oil, gas and other commodities sold abroad.

Kremlin spokesperson Dmitry Peskov said on a conference call Wednesday, the currency’s appreciation has dominated President Vladimir Putin’s discussions with economic officials . “The strengthening of the ruble is a matter for the special attention of the government,” he said.

Thursday’s policy meeting was brought forward by two weeks, spurring expectations for a big reduction and the possibility that capital restrictions may be loosened further. The ruble closed with a loss of 4.3% versus the dollar in Moscow after the announcement Wednesday, ending a five-day streak of gains.

Despite the sweeping sanctions imposed on Russia, surging exports and capital controls have sapped demand for foreign exchange and sent the currency soaring to the highest levels since 2018.

Efforts by the authorities to slow the gains, including two rate cuts in April and the easing of key capital controls earlier this week, so far haven’t helped.

“There is no point in calling an emergency meeting and announcing it to the market unless they are thinking of a large cut,” said Tatiana Orlova at Oxford Economics as reported by Bloomberg.

“I wouldn’t even be surprised at a 700 to 800 basis-point cut.”

The decision is due to be announced at 10:30 a.m. Moscow time, but without the traditional news conference, the central bank said. The next scheduled meeting hadn’t been due until June 10.

The ruble’s 30% gain this year has taken it to “the pain threshold,” said Dmitry Polevoy of Locko Bank. Still, a rate cut alone “is unlikely to stop the strengthening” because it’s driven by a huge trade surplus, he said.