Snip from Drudge Report below just put up on the headline so that means the world is watching this.
In a surprise announcement just before 1 a.m. in Moscow, the Russian central bank said it would raise its key interest rate to 17 percent from 10.5 percent, effective today. The move was the largest single increase since 1998, when Russian rates soared past 100 percent and the government defaulted on debt.
The news prompted an immediate gain in the ruble, with one-month ruble forwards up 1.6 percent in Asian trading.
To the extent that this new policy rate will negatively effect the terms by which the Russian Central Bank provides USD liquidity to member banks over there going forward, this should lead to more weakness in the rouble once the Central Bank engages tomorrow.
We should learn something from the way the system responds to this pretty drastic policy rate adjustment in any case.
14 comments:
Russian banks and the Govt allows their citizens to convert their domestic deposits to dollars. The results are predictable, if not tragic as herd behaviors create pyramids that collapse.
If that is true Ryan then the member banks over there have pretty substantial USD liabilities in effect...
So now if the rate setters over there have not tipped off the liquidity providers then the liquidity providers may use this new policy rate in formulating their USD liquidity terms to the members in a negative way... if they are doing it as "swaps" then what is the "swap rate" and if that rate has to go higher with the policy rate then I'd have to think this hurts the currency vs USD...
Unless today's sell off was due to a tip off the rate setters gave to the liquidity providers that they would be jacking up the rate like this overnight...
If this is "cold turkey" to the liquidity providers then we could have more weakness I'd think...
Should be revealing in any case.... we should be able to 'go to school' on this...
rsp
http://www.cbr.ru/eng/hd_base/?prtid=swapinfo_sub
I thought they created a longer term swap facility but their website is bogged down tonight from all the emergency rate-cut news, I can't find much.
Thx Ryan for the link
You can see how they have been increasing the swap rate as the policy rate has increased. .. oh brother. .. could get ugly...
The correct approach is to put the banks and the systemically important businesses into pre-pack administration *and force losses onto foreign creditors and Russian USD holders*.
The CB should not be providing USD liquidity. Those needing USD liquidity should be buying it with roubles in the market!
The Russian central bank is following the 'sound money' script right down the plughole. And yet this debacle will be used by our opponents to show how floating rate currencies collapse.
Putting interest rates up is exactly the same mindset as trying to achieve a government budget surplus.
Neil they think they have to "make money" at the CB... and they kind of do as if they ever go negative equity they would think they are 'bankrupt' etc
And it may be to the point over there that the CB is the only option as no member bank will trust any other member bank... so the member bank in need of USDs can't get them on a swap from any other member bank .. at any price..
Maybe the US Fed will establish swaplines with the CBR like they did with other global CBs back during the crisis in 2008 but dont hold your breath waiting the way the relationship is.. rsp
If the bank can't get USD, then they shouldn't be offering USD accounts. It's not the job of Russian Regulated Banks to provide USD accounts. If they can't get the liquidity from the USD clearing system then they should be forced to close those accounts by the CBR.
As I said in my post, the CBR is following the neo-liberal mindset right down the plughole.
And this disaster will be used by people to suggest that floating rates can't work.
No they can't work when the monopoly provider is run by idiots. But then neither can anything else.
Good insights Neil....
"run by idiots": Well that is the point I have been trying to make for some years now.... everyone else thinks it is a "contol fraud" or "neoliberal conspiracy"...
FF probably indeed cannot work with how volatile key ex/im commodity prices can vary under it...
FF can handle 5% off Toyotas but not 50% off oil...
rsp
Ryan cant get in to the RCB site right now but did way earlier they put it up to 62 at today's operation...
So this is the exchange rate for today... 62 roubles per USD...
If they go up another 10% on the rate tonight then high 60s or 70 tomorrow..
Infinite regress....
rsp,
"The correct approach is to put the banks and the systemically important businesses into pre-pack administration *and force losses onto foreign creditors and Russian USD holders*.
The CB should not be providing USD liquidity. Those needing USD liquidity should be buying it with roubles in the market!
The Russian central bank is following the 'sound money' script right down the plughole. And yet this debacle will be used by our opponents to show how floating rate currencies collapse."
Neil, you should write a blog post about this.
Neil, you should write a blog post about this.
Definitely.
They are following the central bank script just as they learned it, right over the cliff.
Krugman with more metaphor:
http://krugman.blogs.nytimes.com/2014/12/16/the-ruble-and-the-textbooks/?smid=tw-NytimesKrugman&seid=auto&_r=0
"balance sheets" can have "problems"... and "capital" can "fly"....
??????
Hey Krugman, what happens when they put the policy rate up and then ALL liquidity operations in the Country have to conform to the new policy rate?
What does this do to the new terms for both Rouble AND USD liquidity operations in the country from time t1 to time t2?
"the central bank script"
That script is: "protect the equity of the CB at all costs because if we run out of "money" then we are bankrupt and get sent to the Gulag...."
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