Russia fights against inflation

In a battle against inflation, Russia’s central bank decided today to widen the ruble band trading for the first time this year. The measure is an attempt to control the rising prices and to keep the inflation target. Bank Rossii expanded the band in which it allows the ruble to trade against its target dollar-euro basket to 7 rubles from 6 rubles.

The Bank of Russia manages the ruble in a trading band versus a basket of dollars and euros. So, Bank Rossi buys foreign currency when the ruble strengthens or sells foreign currency to support the ruble when it weakens. The Bank of Russia twice widened the trading band last year.

“Increasing the potential flexibility of the exchange rate through the measures taken will help increase the effectiveness of interest-rate policy used by the central bank to provide price stability,” the Moscow-based regulator said in the statement. So, the ruble’s corridor was widened to 31.65 to 38.65 versus the basket, which remains made up of 55 percent dollars and 45 percent euros.

The Russian central bank also lowered the amount of interventions it will conduct before moving the corridor's boundaries. It will now shift the corridor after buying or selling $450 million worth of foreign currency, while the previous amount for a trading band was $500 million.

The changes are implemented in the context of the gradual transition to the inflation targeting regime which according to the "Monetary Policy Guidelines in 2012 and for 2013 and 2014" is stated as the Bank of Russia's priority in the middle term perspective. Russia's target inflation is between 5% to 6% this year.

According to the Russian government’ forecasts, the country's economy may expand at a faster pace than expected this year. "There are a number of signs that the economy is really growing somewhat faster than we had planned - the rapid growth of investment and decent figures for the manufacturing industry", said this week the country's economic development minister Andrei Belousov. Preliminary data shows that gross domestic product increased 3.9% in the second quarter, and 4.4% overall in the first half.

In terms of balance sheet, Russia has around $500 billion in foreign exchange reserves and relatively little government debt. However, the country has the challenge to to diversify its commodity-driven economy. Oil and gas provides around half of both exports and federal budget revenues, making fiscal stability vulnerable to commodity prices.