UPDATE 1-Russian c.bank moves closer to free float by widening rouble corridor

Mon Aug 18, 2014 4:24am EDT

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By Oksana Kobzeva and Alexander Winning

MOSCOW Aug 18 (Reuters) - Russia's central bank on Monday moved a step closer to its goal of a freely floating rouble exchange rate by widening its trading corridor for the rouble and reducing the interventions it carries out to move the corridor.

The moves are part of a long-term policy shift to make inflation a more important benchmark than the exchange rate after several months earlier in the year when the bank was forced to defend the rouble, which came under pressure due to the crisis in neighbouring Ukraine.

As part of the plan, the rouble's trading corridor will be abolished altogether from January next year and regular daily interventions will cease, although the bank will reserve the right to make discretionary interventions in the interests of financial stability.

The bank said in a statement that starting from Monday it had widened its exchange-rate corridor by 2 roubles to 9 roubles and reduced the intervention threshold for moving the corridor against a dollar-euro basket to $350 million from $1 billion.

It also said it would stop carrying out interventions within the corridor to reduce exchange rate volatility.

"The stated changes have been made within the framework of moving to an inflation-targeting regime, one of the essential conditions for the successful realisation of which is stopping managing the exchange rate," the bank said, reiterating that it aims to move to a free float by next year.

The central bank moves would normally be bearish for the rouble, as the bank will be less active in currency markets to guide the rouble's exchange rate, but the Russian currency temporarily ignored the move in early trading, supported by the approaching end-of-month tax period.

The rouble was 0.36 percent stronger against the dollar and 0.37 percent firmer versus the euro at 0800 GMT.

Alexander Morozov, chief economist for Russia and CIS at HSBC, said Monday's policy move would likely be followed by a cancellation of interventions to move the corridor, effectively completing the shift to a freely floating rouble.

"Given that the central bank has inflation at the top of its list of priorities, this requires a tighter monetary policy so as not to lose the trust of market participants," he said.

In March, Russia's central bank dramatically raised the size of its intervention threshold, to $1.5 billion from $350 million, after the escalating Ukraine crisis caused a massive rouble sell-off, heightening concerns about Russia's overall financial stability.

The higher threshold paved the way for the central bank to spend some $25 billion to defend the rouble, but in June it signalled its policy shift was back on track by reducing the size of interventions to curb currency market fluctuations. (Additional reporting by Katya Golubkova; Editing by Christian Lowe and Andewq Heavens)

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