Effective yesterday, the CBR amended the parameters of its intervention mechanism to further increase RUB flexibility, in particular:
The floating operational band was symmetrically widened from RUB 7 to RUB 9;
Interventions in sub bands were effectively eliminated, and thus the non-intervention zone has widened from 5.1 RUB (37.35-42.45) to RUB 9 (35.40-44.40);
The volume of interventions that trigger a 5-kopeck band shift was lowered from USD 1.0bn to USD 350mn – its lowest pre-March level.
What are the implications?
The CBR seems keen to time this step during a low (holiday) season so as not to distort market trading, and the initial reaction is indeed rather muted. RUBBASK has been trading in an intervention-neutral zone for more than 3 months (barring MoF purchases) and overall seems to have found a new equilibrium (which we believe is c.35-36) without CBR interventions. Therefore, other things being equal, the widening of the non-intervention zone should be neutral for RUB, we believe.
From a liquidity standpoint, sterilisation via the FX channel has been non-existent over the last several months and a more flexible RUB should help to keep this leakage plugged. In the meantime, the CBR will be inclined to cure funding/lending imbalances with higher interest rates.
We believe the level (corridor)-based intervention mechanism by design welcomes unnecessary speculative activity and ultimately the CBR is likely to abandon it and switch to a dirty float regime with interventions triggered mainly by the volatility and financial stability considerations.
In the meantime, should RUB come under significant pressure, the CBR will be inclined to increase rates further citing inflationary risks related to FX pass-through. That said, the probability of a rate hike at the next meeting has increased in any case in light of elevated food inflation.