Russia Defends Rouble, Cuts Purchases of FC

Russia’s central bank halted purchases of foreign currency to replenish the country’s international reserves, a move that may lay the groundwork for a fifth interest-rate cut this year at a meeting on Friday.

The operations were suspended from July 28 as a result of “growth in volatility on the domestic currency market,” the regulator said in a website statement on Wednesday. It also said that currency purchases were reduced to $160 million on Monday from $200 million daily last week. The ruble appreciated as much as 1.4 percent after the announcement before paring gains.

The unexpected move sets the stage for policy makers to extend their easing cycle after a weaker ruble emerged as an obstacle to lower borrowing costs by threatening to reignite inflation. The interventions, compounded by a slump in oil prices, have sent the Russian currency tumbling more than 17 percent since the central bank began its push to rebuild reserves in mid-May, the world’s worst performance in that period.

The central bank will cut their key rate by a half point to 11 percent at their July 31 meeting, according to 25 of 34 forecasts in a Bloomberg survey. It’s already lowered the benchmark by a cumulative 5.5 percentage points this year following an emergency increase in December.

Monetary Stimulus

Looser policy is needed to help combat Russia’s first recession since 2009 amid a slump in oil prices and U.S. and European sanctions over Russia’s support for rebels in Ukraine. Last year’s ruble collapse, the worst since 1998, spurred inflation to the fastest in 13 years and devastated consumer demand, a mainstay of Russia’s economic recovery since the 2008-2009 crisis.

The ruble traded 0.2 percent stronger at 59.8920 against the dollar as of 11:24 a.m. in Moscow. Forward-rate agreements are signaling 13 basis points of decreases in borrowing costs during the next three months, the smallest this year.

The central bank, which allowed the ruble to trade freely last year, has bought about $10 billion since resuming currency purchases on May 13.

Policy Clash

The shift has prompted criticism from banks and officials as going against the regulator’s free-float policy, in which the market sets the exchange rate. The Bank of Russia has defended the interventions as compatible with its free float.