The Russian Central Bank plans to resume its purchases of foreign currency for state reserves that are pegged to oil prices in 2022, after pausing them this year amid the rouble crash, Governor Elvira Nabiullina said.

The central bank (CB) stopped putting pressure on the rouble with foreign exchange (forex) buying on the domestic market and started selling instead earlier this year for the first time since 2015 as the rouble nosedived over an oil price slump and the novel coronavirus.

Russia’s central bank cut the key interest rate to a record low of 4.25% on Friday and said more cuts could be possible, given low inflation and a shrinking economy.

Nabiullina said the central bank planned to restart buying foreign exchange under the fiscal rule when Russia’s Urals oil blend prices average $45 per barrel in 2022.

The bank’s forex (FX) operations are closely watched by rouble traders as they steer Russia’s free-floating currency in the absence of other factors.

The central bank also decided not to carry out FX buying that it had to put on hold during the previous rouble crash in 2018.

Those postponed FX purchases will be netted with FX sales that the central bank planned to carry out as part of the deal to sell its stake in Russia’s No.1 lender Sberbank to the finance ministry, Nabiullina said.

Given that the postponed FX purchases are worth $19 billion, the central bank will sell only $2.6 billion in extra FX intervention in the fourth quarter, said Sofia Donets, chief economist at Renaissance Capital.

Without disclosing the amount that it will sell on the market after netting the internal flows, the central bank said this FX selling should not impact the Russian currency market.  Russia has cut rates four times in 2020 in an attempt to support an economy pummelled by the new coronavirus and related lockdowns, as well as by lower prices for oil, Russia’s key export.

Nabiullina, presenting the rate cut which matched the forecasts of analysts in a Reuters poll, said there was still scope for lower rates. She added that the bank would need to assess the impact of previous rate cuts.

“If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings,” the central bank said in a statement.

The central bank also revised the rate range it considers to be neutral from a monetary policy point of view to 5-6% from 6-7%, sending a signal to investors in Russian bonds that their yields will fall.

The bank also revised its economic forecasts. After gross domestic product shrank by 9-10% in the second quarter, the central bank now expects the economy to contract by 4.5-5.5% this year before returning to growth in 2021.

The central bank had previously forecast a GDP contraction of 4-6% this year.

Inflation, the central bank’s key area of responsibility, is expected to end this year at 3.7-4.2% in 2020, stabilising near its 4% target in 2021 and 2022.

Reuters