OREANDA-NEWS. November 23, 2009. Chairman of the CBR Sergey Ignatiev said that the regulator might alter the current pattern of FX interventions and that the bank saw the need to curb ‘hot money’ inflows, but would not use capital controls to do so, reported the press-centre of VTB Capital.

We think Ignatiev’s comments about the likely discretionary changes in the FX interventions corridor, the need to curb inflation and concerns about capital inflows, signal that the CBR intends to intervene less. Were capital inflows to continue, this would mean more RUB strength.

Pattern of FX interventions to change. According to Ignatiev, the rouble is currently traded in the 26-41 range against the dual currency basket. Within this corridor there is another, narrower floating range (three roubles wide) which adjusts automatically by 5 kopecks down/up when the CBR buys/sells USD 700mn. Ignatiev, however, stated that the CBR might change this floating range at its discretion.

Floating rouble. Ignatiev reiterated that the rouble had become more flexible recently and that the CBR was to move to inflation targeting in the next one and a half to two years. He mentioned the need for greater rouble flexibility to lower inflation and interest rates and, hence, to create longer-term funding for banks.

Regulating capital inflows. The CBR sees the need to limit ‘hot money’ inflows but thinks the best way to do this is to monitor quasi-sovereign corporates’ external borrowing closely and to differentiate reserve requirements for banks. Hence, the regulator once again confirmed that it would not introduce capital controls.

The CBR has purchased USD 6bn in November. This is lower than the USD 16bn bought in October but suggests that capital inflows have continued this month. Given the size of the FX interventions and the higher budget expenditures, the CBR is running the risk of pushing money supply growth and inflation in 2010. This was the case in 2007-08 and we believe that the regulator will try to alter its exchange rate policy in order to avoid the same trap.