The continuing fall of the oil price is hitting the Russian economy hard. Oil-led retreat in the rouble over the past 48-hours propelled USD/RUB above 60.0. Global oil prices have declined rapidly in recent months, down nearly 25% since early May. The RUB has accordingly been hit, down 22% since mid-May and depreciating more than 5% this past week alone. Currency overshoot would put considerable strain on the financial system and probably cause further declines in growth.A continued currency weakness is the last thing the Russian central banks needs at present. It has been fighting high levels of inflation (caused by the rouble depreciation at the end of last year) and as a result raised interest rates. As the situation seemed to improve at the beginning of the year it lowered interest rates notably. Further cuts are expected. Should the rouble remain under pressure thus fuelling inflation again these plans would be at risk. “We predict July inflation will accelerate to 15.9% y/y (from 15.3% in June) following three months of declines. While we expect the increase in inflation will prove to be temporary, it is likely to have a negative impact on inflation expectations. A pause by the CBR would be a signal to the market that the CBR is serious about bringing inflation down”, said Barclays in a research note to its clients.The return of RUB selling pressure puts a dent in the probability of rate cut by the CBR on Friday. The RUB vulnerability and its possible impact on inflation make it unwise for the Bank of Russia (CBR) to cut its key rate at this time. Accordingly, the CBR will likely keep its key rate on hold at 11.5%.The pause will not signal an end to the rate-cut cycle, the CBR will likely cut its key rate during the upcoming year and could resume cuts as early as its next meeting in September. However, it will be interesting to see if the central bank does a U-turn on its resolve to build foreign reserves. The CBR has reportedly built up FX reserves by $10bn since mid-May.“If the RUB were to stabilise and inflation were to drop more than expected, the CBR could react later by cutting interest rates more rapidly. If instead oil prices continue to fall and the RUB is under more pressure, the CBR could remain on hold for more meetings to help support the RUB and limit the inflation pass-through”, added Barclays.On Wednesday the Russian rouble opened 0.8 percent firmer after the central bank said it had halted its forex buying to replenish the country’s reserves, but soon pared gains to trade flat. At 0855 GMT, the rouble was around 0.4 percent stronger against the dollar at 59.76 and had also gained 0.4 percent to 66.11 versus the euro. Russian share indexes rose on Wednesday tracking gains on global markets
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