East Europe Currencies Drop With Ruble After Russia Raises Rates

Moscow-Russia (Dec 16)  Central and eastern European currencies fell as Russia’s biggest rate increase since 1998 failed to stem the ruble’s slump, raising concern that a collapse in the region’s biggest economy will spillover to its neighbors.

The forint slid the most against the euro since January, while the zloty slipped to a one-month low as the ruble plunged the most since its 1998 bond default. The Bank of Russia unexpectedly raised its key interest rate by 6.5 percentage points to 17 percent at about 1 a.m. in Moscow after an emergency meeting as it sought to arrest the ruble’s more than 50 percent slide this year.

“The steep decline in oil prices and the Russian rate increase’s failure to stem the ruble drop has completely dumbfounded the market,” Pal Saaghy, a Budapest-based currency trader at Equilor Befektetesi Zrt. brokerage, said by phone. “We are seeing fear that has started significant capital movements.”

The forint lost 1.2 percent to 312.95 per euro at 1:20 p.m. in Budapest, after dropping as much as 1.6 percent earlier in the day. The zloty weakened as much as 1.3 percent to 4.2381 per euro, the weakest since Nov. 14. The ruble tumbled 17 percent to 77.76 per dollar, taking this year’s loss to 58 percent.

“We are now potentially at the beginning of a major regional shake out,” Gabor Ambrus, a London-based analyst at Royal Bank of Scotland Plc, wrote in a research note today. Hungary and Poland are “particularly vulnerable to Russian contagion if we get past what we called the inflection point,” he said.

Hungary’s central bank will leave its benchmark interest rate unchanged at a record-low 2.1 percent today, according to all 16 economists in a Bloomberg survey and in line with rate-setters’ pledge to keep rates on hold until the end of 2015. Analysts from Barclays Plc to JPMorgan Chase & Co. see the National Bank of Hungary opting for rate cuts next year on the back of the fastest deflation in at least four decades in November.

Poland will report November core inflation and wages data at 2 p.m. today. Investors seeking hints on how deep the drop in consumer prices could be, after the main price gauge fell by more than expected yesterday.

“Whenever the ruble declined strongly, the zloty also fell, but it has always been a short-term reaction,” Rafal Benecki, the chief economist at ING Groep NV’s Polish unit said by phone from Warsaw. “There’s a bit more space for further weakening of the forint.”

Source: Bloomberg