Russian rouble weakens, raising doubts over rate cut resolve

By Gleb Bryanski and Elena Fabrichnaya

MOSCOW, Sept 11 (Reuters) - The Russian rouble continued to weaken against the dollar and the euro on Thursday, prompting analysts to question the central bank’s resolve to cut its key rate at its meeting on Friday.

The central bank is expected to lower its benchmark rate by two percentage points to a median 16%, as the economy slows more than anticipated, according to a Reuters poll of 28 economists conducted on September 8.

A stronger rouble, which rallied by more than 45% at the start of the year, helped the central bank bring inflation down by making imports cheaper. The currency has fallen by more than 5% against the U.S. dollar since the start of this week.

The rouble’s slide added to concerns about a stagnating economy, a widening budget deficit and the risk of new Western sanctions targeting buyers of Russian oil, the main source of budget revenue.

"The rouble's recent weakening and uncertainty around budget plans may once again incline the regulator to take a more cautious step and maintain conservative rhetoric," said Sofya Donets of T-Bank.

KREMLIN REACTION

Kremlin spokesman Dmitry Peskov said fluctuations in the rouble's exchange rate were part of normal market processes, benefiting some market participants while disadvantaging others.

"But overall, the macroeconomic situation remains calm, reliable and predictable, despite the rather unsettled state of the global economy," Peskov said.

By 1530 GMT, the rouble RUB= was down 0.4% at 84.77 to the dollar, according to LSEG data based on over-the-counter quotes, and was at 99.04 to the euro, having recovered some ground after weakening to 100.45, its lowest level since March, during the session.

On the Moscow Exchange, the rouble weakened 0.3% to 11.93 against the Chinese yuan, the most traded foreign currency in Russia, after briefly slipping past the 12 mark earlier in the session.

Analysts linked this week’s decline to expectations of a rate cut, rising import demand and renewed sanctions risks. After this year’s rally, the rouble is viewed as overvalued.

"The rouble’s weakening this week is expected by the market amid declining export revenues, a revival of imports and the gradual reduction of the key rate," said Maxim Timoshenko of Russian Standard Bank.

BUDGET RISKS

Natalya Milchakova of Freedom Finance Bank said that accelerated foreign-currency sales on Thursday morning could have been sparked by August data released on September 10, which showed month-on-month deflation, the first monthly decline in a year.

"This data convinced the market that there is no alternative to a key rate cut tomorrow, generating concerns about the side effects of monetary policy easing for the rouble,” she said.

Uncertainty over next year’s spending plans and the risk of a second increase to this year’s deficit target add to scepticism about a rate cut, as the central bank has repeatedly stressed the importance of prudent fiscal policy.

Russia is set to exceed the planned deficit of 1.7% of GDP this year. Revenue from oil sales fell by $920 million from July to $13.51 billion, according to the International Energy Agency.

The deficit for the first eight months of the year was above target at 1.9%. Reuters calculations show that, at current oil prices, an average exchange rate of 92 to the dollar in September, would generate enough revenue to bring the deficit back to target.