Central Bank plans to keep lid on rouble’s strength

The Central Bank said that it would keep a lid on the rouble’s strength next year to help local firms compete with foreign products, despite calls from the IMF for a more flexible exchange rate policy. The International Monetary Fund says Russia would benefit from allowing a faster appreciation of the rouble, propelled by country's solid balance of payments, to curb its double digit inflation.
But the Central Bank's 2004 monetary policy blueprint suggested the bank intended to mop up dollars to keep the real appreciation of the rouble under 7 % next year. "At the current stage the Central Bank does not consider it possible to reject the policy of a managed floating rate," the bank said in its monetary policy guidelines presented for debate in the Cabinet.

At present, the Central Bank moves fast to curb what it judges to be excessive exchange rate volatility on the local market. The bank said it was premature to let the rouble float because the local currency was still hostage to global prices for crude and gas, the country's main export.
"In the environment of relatively high prices for crude oil, an excessively fast transition from a managed to a free float of the rouble may lead to a sharp change in the relative attractiveness of assets denominated in Russian and foreign currencies," it said.

The rouble has been rising steadily against the dollar this year thanks to high global crude prices and heavy corporate borrowing abroad, sparking complaints that its strength could blunt the competitive edge of local producers. Central Bank chief Sergei Ignatyev said the bank had prepared two outlooks for next year, one under which the price for Urals crude is $ 18.50 per barrel and the second under which it is $ 22 per barrel.
"The second [more optimistic] option is the more likely one," Ignatyev was quoted as saying. The bank pledged to keep the real rouble’s rise under 6 % against the euro and dollar this year. Heavy inflow of oil dollars also buoyed the Central Bank's foreign currencyreserves, enhancing the country's creditworthiness, but the rise has resulted in fast expansion of money supply, highlighting inflationary risks.

The Central Bank said it will focus on reaching the government-mandated inflation target of 8 % to 10 % next year, the lowest rate in the country's post-Soviet history, but noted that a tight fiscal policy was key to keep money supply in check.
"The Central Bank will target 2004 inflation through a combination of three instruments of monetary policy: the exchange rate policy, restriction of money supply... through open market operations and setting short term Central Bank interest rates," it said.

According to the guidelines, the country's monetary base, an economic indicator used to forecast inflation, should rise 17 % to 24 % next year to keep inflation in check. The Central Bank missed its money supply target this year, although a sharp increase in rouble demand from investors as well as a shift of Russians away from a weakening dollar to the rouble offset some monetary inflation pressure.
Government officials hope to trim inflation, one of the country's key economic woes, to 12 % this year but many analysts say that estimate looks overly optimistic given that consumer prices rose 8.7 % in the first seven months of the year.