CBR to factor exchange rate into monetary policy decisions, cautions against conspiracy theories about weak ruble

ST. PETERSBURG. July 6 (Interfax) - The most important factor for the floating exchange rate of the ruble is foreign trade and its current slide carries pro-inflationary risks, so the Central Bank of Russia (CBR) will factor this into its decisions on the key interest rate, Central Bank chief Elvira Nabiullina said.

"In our decisions on monetary policy we, of course, take into account the dynamic of the exchange rate, how it might play out. We consider these risks. Right now the dynamic of the exchange rate carries pro-inflationary risks and we will factor this in when making decisions on the key rate," Nabiullina said at the CBR's Financial Congress.

"But one more important note is that low, predictable inflation in itself reduces fluctuations of the exchange rate. This is demonstrated by international experience. In other words, the more predictable, the lower inflation, the less fluctuation in the exchange rate," she said.

She also said that the exchange rate is primarily affected by foreign trade and that speculation that the ruble is being intentionally weakened to benefit the government budget was nothing more than a "conspiracy theory."

"We see that when our exchange rate weakens various conspiracy theories begin, that it's virtually an intentional weakening in order to increase budget revenues, or some other theories. But we need to look foremost at the dynamic of foreign trade. It determines the movement of the exchange rate to a large extent," Nabiullina said.

She cited the dramatic strengthening of the ruble in 2022. "Many saw this as a victory over circumstances, but we must honestly admit that this was foremost the result of the steep growth of exports and drop in imports at the time," Nabiullina said.

The ruble's current weakening is also "explained in large part by foreign trade," she said. The current account surplus in the first quarter of 2023 "fell 80% compared to last year's peak, so the floating exchange rate changes under the influence of foreign trade," Nabiullina said.

"We have an instrument to smooth out short-term fluctuations, our swaps. But a floating exchange rate, in our view, is a blessing that allows the economy to more easily absorb these external changes, shocks," Nabiullina said.

She also said that, while foreign trade is the most important factor for the dynamic of the exchange rate, it is also affected by the "growth of budget spending, which increases demand in the economy and thus demand for imports." Furthermore, short-term fluctuations can be driven by geopolitics, she said.

"Nonetheless, we believe that a floating exchange rate can, indeed, be volatile amid shocks, but it's important that it not break away from fundamentals like exports and imports. Attempts to artificially support this exchange rate, and we know this from our history, end with periods of deep devaluation, when this does not happen gradually and businesses face such shocking changes," Nabiullina said.