RUB sell-off may force CBR to increase key rate next week

RUSSIA ENERGY / FINANCE - In Brief 21 Jan 2016 by Marcel Salikhov

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RUB weakness since beginning of the year (and especially today with RUB/USD reaching maximum of 85.99) raises questions whether CBR should (and would) take steps to mitigate the panic. Today CBR head called an emergency meeting with top commercial bankers to discuss stability of the banking sector. RUB was relatively firm with oil prices going below $30/barrel. So it is mainly adaptation of floating to current oil prices rather some specific FX shock. Our calculations show that if oil prices average $30 barrel in 2016 ‘fair’ value of RUB/USD is 90.3 assuming no changes to key rate (table below. But in this scenario there’s no chance that inflation stay below 10% by year-end. Brent prices and RUB/USD in 2016-2016 Source: Bloomberg, CBR There’s a high chance that CBR will decide to increase key rate on next meeting (29th of January) if there’s no rebound in oil prices by that time. In the last Policy Review published in December authorities stated that they are ready to tighten in a stress scenario ($35/barrel for Urals in 2016). Such a scenario materialized earlier than almost everyone has thought. Forecasts for inlation and RUB/USD in dec'2016 with different oil price (rows) and key rate assumptions Source: IEF estimates based on Russian short-term monetary model. Oil price assumptions assume linear growth to the values set in rows. Key rate assumptions assume linear growth to the values set in columns. There was a Bloomberg story that CBR may start FX interventions if RUB/USD reaches 90. We think it’s unlikely. While CBR doesn’t target any specific RUB value of barrel of oil for the budget, it doesn’t make sense for them to spend reserves in uncertain times and ‘harm’...