By Toni Vorobyova
MOSCOW, March 12 (Reuters) - The Russian rouble is settingfresh 14-month peaks versus a euro-dollar basket on an almostdaily basis, increasing speculation the central bank could putthe brakes on the rally in order to protect economic growth.
Rate cuts, reserve requirement hikes and bigger currencymarket interventions are all among the possible tools -- ifauthorities decide they actually want to stop the rally.
Following are some questions and answers on the issue:
WHY IS THE ROUBLE RALLYING?
1. Oil. The price of Russia"s key export, has surged over 10percent in the past month, boosting prospects for the economy.
2. Rates. The central bank has cut the benchmark refi rateby 450 basis points since April 2009 to a record low. But at8.50 percent compared to rates of 1.00 percent or less in theother G8 economies, Russia still offers very attractive yields.
3. Taxes. To meet domestic tax payments, exporters need tochange their earnings into roubles. As the global economy andcommodity prices recover, this amount rises. The next round ofpayments is about to start, with bank Trust estimating that upto 200 billion roubles is due on Monday alone.
4. Europe"s woes. Concerns about the health of some Europeaneconomies has raised the appeal of emerging markets. Flows intoRussia Equity Funds hit a 20-week high of $411 million in thelatest week, according to EPFR data. [ID:nN11229971]
WHAT CAN THE CENTRAL BANK DO?
1. STEP UP INTERVENTIONS
The central bank lets the rouble"s floating trading bandshift by 5 kopecks for each $700 million of interventions at itsboundary. It has already done this 15 times since February,taking the band to 34.25-37.25 roubles per basket, dealers say.
The interventions at each step could be increased to $1billion or more. Aside from the risk of stoking inflation, thereis virtually no limit on how much foreign currency it can buy.This is likely to be the most effective tool against the rally.
But it would mean a step back on Russia"s path towards afree-float and goes against the central bank"s assertion thatrouble"s volatility will only increase in the future. Thirdly,inflation is finally on a downward trend after years ofovershooting targets and the central bank may be reluctant torisk this by flooding the market with too many roubles.
2. CUT RATES
Russia"s central bank had been expected to cut the refi rateby a further 75 basis points by end-September as inflation iseasing and the economic recovery remains fragile. [ECILT/RU]
The rouble"s rally has fanned expectations that the cutscould be bigger or faster -- ING and VTB Capital have both saidthe chances of a 50 basis point move this month have increased.
But cuts are unlikely to be deep enough to fully eraseRussia"s yield advantage at a time of rising risk appetite. Thecurrency has shown little reaction to past rate moves.
3. HIKE RESERVE REQUIREMENTS
This will limit the spare cash the banks have forspeculating on the currency market. The resulting reduction ofliquidity in the market will also help counterbalance the inflowof roubles from central bank interventions.
The central bank has signalled that reserve requirementhikes are likely in the future, but -- as with rate cuts --analysts doubt they can be substantial to have an big impact.
CAN IT DO NOTHING?
Politicians, who have in the past lamented the rouble"sstrength as a threat to economic growth, have stayed silent thistime, as have central bank officials.
The rouble is still 15 percent below the peak of 29.25against the basket set before the crisis hit in summer 2008.
Its gains of 2.5 percent in the past month are less thanhalf those seen in September, when the central bank did notswerve from the current interventions policy.
The rouble"s gains have been more pronounced against theeuro -- a potential boon for the struggling retail sector, ascheaper European imports could encourage consumers to buy more.
Against the dollar, the rouble"s move has been more modest,thus limiting the impact on the earnings of influential energyand commodity exporters and on the taxes they pay.
Letting the rally run its course would also prove Russia"sresolve to move towards a free-float by 2012.RISK OF CORRECTION?
Some analysts, such as those at BNP Paribas, are starting towarn that the rouble could be getting into overbought territory.
A correction could be caused by central bank actions, aretreat in oil, or an external event which hits risk appetite.But, with over $400 billion of reserves, Russia"s centralbank has the capacity to protect the rouble against an excessivesell off if necessary.
(Editing by Toby Chopra)
Currencies
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