Russia’s rate cuts are not moves in a Currency Devaluation game

According to Bloomberg, President Trump tweeted this statement early Monday morning:

Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!

For decades, China has been intermittently accused of keeping the yuan undervalued. Unlike China, Russia is not a major US trading partner, and its exchange rate regime is floating rather than a mix of fixed and floating. Since 2015, Russia’s Central Bank (CBR) has been targeting inflation rather than an exchange rate band, and has brought inflation down to below 3%.

In the fall of 2014, the ruble got hit by falling oil prices and the MH17 sanctions, forcing the CBR to hike its key rate briefly to 17% to prop up the ruble. A few months later, having officially switched from currency stablization to inflation targeting, it started cutting the rate, gradually bringing down to 7.25%.

Of course any rate cut could be interpreted as deliberate devaluation, and it’s understandable that both Russian exporters and domestic producers competing with imports prefer a weak ruble. There have been calls from certain quarters for the CBR to slash the key rate down to just above zero so that the cheap credit would kickstart the economy. However, the CBR has so far resisted such inflationary proposals.

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