What's Next ?, Types of Exchange Rates, Balance of Payments...

What's next?

First, the Central Bank should clearly articulate its goals and clearly convey them to those who are interested. While such clarity from the mouth of the Central Bank is not audible. First he says that he goes to the floating rate immediately, without waiting for the New Year. And the next day, seeing what this leads to, issues a statement of his readiness "to lay down with the bones" to protect the ruble. The strength of any central bank in the world is much more dependent on the confidence that its words evoke than from the billions that it is willing to spend.

Secondly, it seems to me that in the short term, the ruble's exchange rate is clearly underestimated. Its fall of 30% since the beginning of the year is enough to stop a significant part of the import, as a result of which a sufficient number of "free" currency. And this means that at that moment the ruble exchange rate will reverse and may increase by ten percent. Therefore, everyone who wants to make money on the short horizon, I sincerely recommend to think about.

Thirdly, the fall of the ruble may continue and the ruble may well lose another 10-20% by the end of the year, unless the Central Bank revises its approaches to lending to banks. If cheap (and 9.5% per annum - extremely low cost of ruble resources in the current situation), rubles will continue to pour into the market, then the ruble does not expect anything good. And on what channels these rubles will go to the banking system - through REPO, secured loans, loans for investment projects, purchase of VEB bonds - it's absolutely unimportant. All of them will inevitably go to buy currency.

And the last. If we talk about the long-term trend, then with the United States inflation rate and with the economic policy that is being pursued, the ruble can not be strengthened in the long term. You can not get a stable balance of payments without structural changes in the economy. And they, in turn, are impossible without changing the relationship between government and business, without reforming the judicial system, without restoring the normally functioning system of property rights protection - all that is called improving the investment climate.

Source. Alexashenko Sergey. RBC: banki.ru/news/bankpress/?id=7320136


Types of Exchange Rate

Fixed and floating exchange rates are not the only options for central bank action. These are extreme measures, between which there is a whole range of possible foreign exchange policy of the Central Bank.

When we say fixed the exchange rate, we are talking about a strictly defined level of exchange of one currency for another: e = cost . With free floating (floating exchange rate), the Central Bank does not intervene at all in the activity of the foreign exchange market. In the case of the so-called dirty swimming (dirty floating ), a generally floating exchange rate is adopted. However, the Central Bank intervenes in the activity of the currency market in the event of extreme fluctuations in the exchange rate. A kind of dirty swimming is a mechanism for regulating the exchange rate, called the "snake". Here we are talking about establishing a currency corridor - the limits of free exchange rate fluctuations. The currency corridor can be rigid or flexible (Figure 14.7).

The mechanism of the currency corridor

Fig. 14.7. The mechanism of the currency corridor

While the dynamics of the exchange rate remains within the corridor, the central bank does not interfere in the activities of the foreign exchange market, the rate is determined in a free manner on the basis of a comparison of supply and demand. Intervention of the Central Bank will be observed only if the course dangerously approaches or exceeds the boundaries of the corridor.

In some countries there is a fixed rate (pegging). The exchange rate of a national currency is attached to any currency, US dollar, euro, pound sterling, e. As a rule, the currency of attachment is money with a high purchasing power, a hard currency, the currency of the main trading partner of the country. The Central Bank does not set all bilateral rates, but only one - with the binding currency (anchor currency). The remaining exchange rates are automatically determined based on the dynamics of this hard currency of attachment. In some cases (for example, in Turkey, Poland, Hungary), attachment can occur not to one currency, but to a basket of currencies.

In countries where the national currency is very weak and economic development is low and/or accompanied by high inflation, economic agents, both national and foreign, prefer to conduct transactions not in national currency but in some more reliable monetary unit. For example, there may be a dollarization of the economy - the use of a predominantly dollar in circulation. For example, in the 1990's and early 2000's. in countries such as Argentina, Chile, Peru, the two currencies - the national currency and the US dollar - functioned as perfect substitutes, so that you could pay for your purchases directly in dollars.

Balance of Payments and Exchange Rate

The type of exchange rate and the monetary policy of the central bank are closely interrelated with the country's balance of payments.

Suppose a positive balance of payments (current account and capital account) is observed in the country. A positive balance means the inflow of foreign capital into the country. Demand for the national currency will exceed its supply.

With a fixed exchange rate, the Central Bank will be forced to sell the national currency for foreign money. Official reserves will increase in foreign currency, but will decrease in national currency. In the balance of payments, we will see a negative change in official reserves. With a floating exchange rate, the excess of demand over the supply will create pressure on the exchange rate, the value of the national currency will increase, and international reserves will not change.

In the event of a deficit in the balance of payments, capital will leave the country. Demand for the national currency will be less than its supply. With a floating exchange rate, there will be a downward pressure on the exchange rate, the value of the national currency will decrease, there will be no change in official reserves. With a fixed rate, the central bank will be forced to purchase the national currency, selling official reserves. The size of official reserves in international currency will decrease, but will increase in the national monetary unit. Therefore, the change in the account of official reserves in the balance of payments will be positive.

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