Commerzbank’s Michael Pfister notes that the Russian Central Bank surprised markets by cutting rates only 25 bps to 14.25%, instead of the 50 bps expected, signalling a hawkish stance and caution on further easing. However, he argues this offers little support for the Russian Ruble (RUB), given capital controls, indirect pricing via Chinese Yuan (CNY) and US Dollar (USD), and the dominance of war and energy shocks for RUB performance.

Hawkish cut fails to lift RUB

“Instead of cutting rates by 50 basis points, they were cut by just 25 to 14.25%, accompanied by a statement that a decision on whether to implement further rate cuts would first have to be made at forthcoming meetings. This was thus a strong hawkish signal.”

“As expected, this did little to help the rouble. If the rouble were a freely tradable currency, such a signal would have triggered a rally despite considerable political pressure.”

“But the rouble is no longer freely tradable; it is now quoted solely via indirect links through the CNY-RUB and USD-CNY exchange rates.”

“Consequently, even if the central bank were to halt interest rate cuts in the near future, it would do the currency little good. As no real capital inflows are possible, market participants find it difficult to benefit from the higher interest rate, and the rouble cannot appreciate either.”

“The rouble only appreciates when there are prospects of an imminent end to the war (coupled with the hope that sanctions will be eased), or in the event of a significant energy price shock, as we have seen in recent months. Monetary policy cannot change this.”

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