Click to enlarge — from an old St Louis Fed paper…
(Yes, the x-axis is funky)
Some historical context to place Monday evening’s 650bps move in Russia, big as it was, in some perspective. The central bank lending rate in the 1998 Russian crisis was just a little nuttier. The CBR hiked from 30 per cent to 150 per cent between May 19 and May 27 that year.
To say nothing of the scale of rate moves, this was a very different crisis back then; when the Yeltsin government faced plummeting tax revenues, oil prices were halving (from $11 to $23 a barrel) and sovereign default was on the way given reserves were distinctly outnumbered by the debt. And ultimately, the CBR failed.
This is not 1998 again. In 2014, the rouble’s fall was tolerated precisely to allow the economy and the budget to adjust to a classic external shock; there’d be little point dissipating FX reserves — now $400bn — on fighting the move in oil prices. Meanwhile, the war in Ukraine, plus the effects of sanctions and food import bans, made domestic inflation a problem.
Throw in a longstanding objective for the rouble to free-float and the CBR’s response has been textbook, actually: rate hikes, some intervention, no capital controls. Then followed Monday’s rouble collapse (and a CBR forecast that the economy will contract quite a bit in 2015 if oil prices stay near $60 a barrel). The 1am response is also orthodox though, despite its size.
Either the rouble will shore up at the market open — such that Elvira Nabiullina stands a pretty good chance of winning Central Banker of the Year awards in 2015, which would be an absolutely banner year for Russian assets — and similar to Turkey in January the hike ends up a temporary measure to be followed by multiple subsequent rate declines. Or, alternatively, it won’t. And it would be interesting to see what the CBR does then.
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