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Monday, September 25, 2017

VTB: Central bank currency move may cause "unnecessary speculative activity"

Russia's VTB Bank recently responded to the central bank's move on Monday to amend the parameters of its currency intervention mechanism to further enhance the flexibility of the ruble, saying that the bank is edging closer to a floating rate.

The floating operational band was widened from seven rubles to nine rubles, while intervention in sub-bands were essentially eliminated, according to VTB.

In addition, the volume of interventions that lead to a five-kopeck band shift dropped from $1 billion to $350 million, the lowest pre-March level.

"The [Central Bank of Russia] seems keen to time this step during a low (holiday) season so as not to distort market trading, and the initial reaction is indeed rather muted," VTB Capital analysts Vladimir Kolychev and Daria Isakova said. "RUBBASK has been trading in an intervention-neutral zone for more than 3 months (barring MoF purchases) and overall seems to have found a new equilibrium (which we believe is c.35-36) without CBR interventions."

The widening of the non-intervention zone should be neutral for the ruble, the analysts said.

"We believe the level (corridor)-based intervention mechanism by design welcomes unnecessary speculative activity and ultimately the CBR is likely to abandon it and switch to a dirty float regime with interventions triggered mainly by the volatility and financial stability considerations," Kolychev and Isakova said.

At the same time, according to the analysts, should the ruble come under major pressure, the CBT may raise rates to alleviate inflationary risks.