28 Apr 2014
EMEA EM Express: Russia's central bank hikes rates on rising inflation, surprising markets
FXStreet (Łódź) - Russia's central bank decided to hike its key interest rate from 7% to 7.5% on Friday as inflation continued climbing. The move comes after an increase carried out at the march monetary policy meeting: from 5.5% to 7%. As the hike was described as “temporary” the general expectation for April was that the policy would remain unchanged.
"The probability of inflation exceeding the 5.0% target at the end of 2014 has increased substantially," the Bank of Russia said in the official statement, adding that the hike would help maintain inflation no higher than 6% by the end 2014.
In the opinion of Cristian Maggio, Senior Emerging Markets Strategist at TD Securities: “At this point, there appear to be large upside risks to further rate moves. 50bp of hikes have been largely insufficient to halt the RUB slide.”
“With a month left before the planned Ukrainian elections and the likelihood of increasing tensions, the risks are clearly rising that the CBR may ultimately need to intervene more forcefully by raising rates into double digit territory, resuming significant FX intervention, and/or providing significantly more direct credit support to corporates. ”
A few hours before the Russian central bank´s decision was announced Standard & Poors downgraded the country´s credit rating to BBB- from BBB, saying that “the tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects.
Meanwhile over the weekend the situation in Ukraine remained tense with pro-Russian separatists in the eastern regions of the country holding eight foreign observers from the Organization for Security and Co-operation in Europe hostage and taking control over more government buildings.
The EU and the US are expected to announce further sanctions against Russia as early as today. The BBH Global Currency Strategy Team point out that the EU is more reluctant to push with more severe sanction as “its trade ties with Russia are ten times greater than the US.”
“That said, anecdotal reports suggest that the sanctions are having a larger effect than the sheer numbers imply, and in particular, a greater cooling effect in financial channels,” the analysts add.
Economic data
Turkish Consumer Confidence improved from 72.7 seen in March to 78.5 in April, according to data released on Monday by EcoWin.
On Sunday Israel published monthly Industrial Output data which showed a 3.4% rise in February, compared with the 1.5% drop in January.
On Friday Hungary informed that the Quarterly Unemployment Rate slid to 8.3% in arch, from 8.6% in February.
Technicals
Despite the Russian central bank's unexpected decision to hike rates on Friday the ruble tumbled by 0.7 percent to 36.0360 against dollar on Friday. On Monday the USD/RUB was trading at 36.0212.
On Friday the USD/RUB daily FXStreet Trend Index was slightly bullish, with the OB/OS Index neutral. RSI was at 56 at the last close, and has slid to 52 so far today. Daily 2-StDev Volatility Bandwidth was shrinking at 2953 pips, with ATR (14) shrinking at 3125 pips. The 1D 200 SMA was at 33.7006, while the 1D 20 EMA was at 35.7599.
"The probability of inflation exceeding the 5.0% target at the end of 2014 has increased substantially," the Bank of Russia said in the official statement, adding that the hike would help maintain inflation no higher than 6% by the end 2014.
In the opinion of Cristian Maggio, Senior Emerging Markets Strategist at TD Securities: “At this point, there appear to be large upside risks to further rate moves. 50bp of hikes have been largely insufficient to halt the RUB slide.”
“With a month left before the planned Ukrainian elections and the likelihood of increasing tensions, the risks are clearly rising that the CBR may ultimately need to intervene more forcefully by raising rates into double digit territory, resuming significant FX intervention, and/or providing significantly more direct credit support to corporates. ”
A few hours before the Russian central bank´s decision was announced Standard & Poors downgraded the country´s credit rating to BBB- from BBB, saying that “the tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects.
Meanwhile over the weekend the situation in Ukraine remained tense with pro-Russian separatists in the eastern regions of the country holding eight foreign observers from the Organization for Security and Co-operation in Europe hostage and taking control over more government buildings.
The EU and the US are expected to announce further sanctions against Russia as early as today. The BBH Global Currency Strategy Team point out that the EU is more reluctant to push with more severe sanction as “its trade ties with Russia are ten times greater than the US.”
“That said, anecdotal reports suggest that the sanctions are having a larger effect than the sheer numbers imply, and in particular, a greater cooling effect in financial channels,” the analysts add.
Economic data
Turkish Consumer Confidence improved from 72.7 seen in March to 78.5 in April, according to data released on Monday by EcoWin.
On Sunday Israel published monthly Industrial Output data which showed a 3.4% rise in February, compared with the 1.5% drop in January.
On Friday Hungary informed that the Quarterly Unemployment Rate slid to 8.3% in arch, from 8.6% in February.
Technicals
Despite the Russian central bank's unexpected decision to hike rates on Friday the ruble tumbled by 0.7 percent to 36.0360 against dollar on Friday. On Monday the USD/RUB was trading at 36.0212.
On Friday the USD/RUB daily FXStreet Trend Index was slightly bullish, with the OB/OS Index neutral. RSI was at 56 at the last close, and has slid to 52 so far today. Daily 2-StDev Volatility Bandwidth was shrinking at 2953 pips, with ATR (14) shrinking at 3125 pips. The 1D 200 SMA was at 33.7006, while the 1D 20 EMA was at 35.7599.