Exchange-rate pass-through: why it is incomplete, lagged and asymmetric

Exchange-rate pass-through is the share of a change in the exchange rate that ultimately turns into a change in domestic prices. The key word here is "share": pass-through is almost never complete. A weaker rouble does not lift price tags by the same amount that the currency has lost. The effect is spread out over time, absorbed along the chain of intermediaries, and stronger on the way up than on the way down. Understanding this mechanism answers a practical question for the macro reader: what exactly will happen to inflation, the policy rate and long-dated debt after a sharp move in the exchange rate, and what will not.

What is passed through, and through which channels

The direct channel is imported goods. Their rouble price is mechanically recalculated at the exchange rate, so household appliances, cars, medicines and components react first. The indirect channel is the imported content of domestic production: raw materials, equipment, packaging, logistics. Here the price reaches the shelf more slowly, because it passes through several stages of processing, and at each one part of the cost increase is eaten up by margins. The third channel is expectations: if businesses and households regard the currency's weakening as lasting, prices adjust in advance, even before a particular batch of goods becomes more expensive.

A separate channel is the prices charged by domestic producers of exportable goods. When a company has the alternative of selling its output for foreign currency, the domestic price is pulled towards export parity regardless of whether demand at home is growing. That is why pass-through is visible in fuel, metals, fertilisers and grain — where the domestic and external markets are linked by the same tonne of product.

Why pass-through is incomplete and lagged

The reason lies in the contract structure. Deliveries are contracted in advance, inventory in the warehouse was bought at the old exchange rate, part of the settlements is made in roubles, and some importers hedge their currency risk. Between the move in the exchange rate and the price tag stand the costs of changing prices: relabelling, negotiations with retail chains, the risk of losing market share. The more competitive a segment, the more of the cost increase a supplier is forced to absorb in its own margin rather than pass on to the buyer.

The lag means that the strength of pass-through cannot be judged from the first weeks after a jump in the exchange rate. The effect unfolds over several quarters, and by the time it shows up in full in the data, the currency may already have moved the other way. The site does not maintain consumer price or exchange-rate series, so there is no numerical estimate of pass-through for Russia here — the proper source is the publications of the Bank of Russia and Rosstat, while the market reaction can be tracked through the news feed and the events calendar.

Asymmetry: faster up than down

The most practical property of pass-through is its asymmetry. When the national currency weakens, sellers raise prices willingly and quickly: the increase is easy to explain to customers. When it strengthens, there is almost no reverse movement — instead, the margins squeezed at the previous stage are rebuilt. So a "weakening–strengthening" cycle leaves behind not a zero but a positive imprint on the price level. Expecting a stronger rouble to bring price tags back down is a typical mistake in macro forecasting.

The second asymmetry concerns the size of the move. Businesses ignore small fluctuations in the exchange rate, while large ones perceived as lasting are passed on noticeably more readily. The monetary policy regime matters a great deal here: with anchored inflation expectations and a predictable rate response, pass-through is weaker, because a jump in the exchange rate is read as temporary.

What this means for the debt and equity markets

For bonds, pass-through is a causal chain: "exchange rate → prices → expectations → key rate → yields". Faster pass-through raises the probability of a hawkish response from the regulator, and therefore hits long-dated fixed-coupon issues harder than short ones; floaters and inflation-linked issues take on the protective role. The line-up and maturities can be seen in the OFZ section, with a broader view in the bonds section.

For equities, the dividing line is the currency structure of revenue and costs. For exporters, a weaker currency lifts rouble revenue before it lifts costs; for companies with imported costs and domestic demand, it is the opposite — margins are squeezed until the cost increase can be passed on in prices. This is worth checking not by sector labels but in the financial statements: the share of foreign-currency revenue, the currency of debt, the structure of the cost of sales. Starting points are the share quotes and the financial reports section; the dividend consequences of the exchange rate usually appear with a lag, in the next payout season — upcoming events:

Careful: in market jargon the same word means something else

In Russian exchange slang, the word used for pass-through more often refers not to the exchange rate but to holding a position overnight and to the charge for doing so. This is a different mechanism and different money: position rollover, the cost of rollover, the rollover fee, as well as the tax-related loss carryforward. If those are what you were looking for, start with the glossary — macroeconomic exchange-rate pass-through has nothing in common with them except the coincidence of the word.