Danske Research Team
Danske Bank A/S
Rouble liquidity squeeze hits following the rate hike.
Rouble rate may see stabilisation over the holidays in Russia.
Russian economy is likely to be sent into deeper recession in 2015.
Assessment and outlook
The Bank of Russia is under strong political pressure to stabilise the rouble. Early this week, a 650 basis point rate hike took place sending the market into panic: the rouble, shares and bonds. On Tuesday, the rouble weakened against the euro by up to 36% during the day. Rouble volatility is currently at its highest level (see the chart on the right), spreads are very wide and hedging is particularly expensive.
The central bank's credibility is currently weak. To stabilise the rouble, the central bank has squeezed rouble liquidity, sending interbank rates into the sky as the overnight rate hit 50% and the one-month implied yield in FX swaps increased to 40%. We believe the squeeze will continue to keep rouble liquidity low, at least over the New Year and Christmas holidays in Russia, to make Russian consumers happy with a stronger rouble. Overnight interest rates soared to 50% on 18 December. At the press conference on 18 December, Vladimir Putin said tight liquidity was needed to stabilise the rouble but only temporarily.
Thus, a terrible start to the week for the Russian rouble has stabilised over the past two days. However, the (temporary?) stabilisation of the rouble has not been for free. We expect monetary contraction to send the economy into a deep recession in 2015. We plan to publish new forecasts shortly.
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