Russia’s central bank, which has raised borrowing costs twice in 2014, kept its benchmark interest rate unchanged with inflation set to peak this month and the ruble recovering from a five-year low.
Policy makers led by Chairman Elvira Nabiullina have raised the benchmark by 200 basis points since February as a standoff with the U.S. and its allies over Ukraine intensified. The effort has stemmed declines in the ruble triggered by the threat of wider economic sanctions, making it the best performer in emerging markets since the April 25 rate increase.
“We are very concerned about” a potential “situation whereby the pace of economic growth could decline steadily and the inflation rate could rise steadily,” which can’t be allowed to happen in Russia, Nabiullina told reporters following the meeting in Moscow today. “In this regard, we took measures to get inflation under control, not to let it grow, and to return to the trend of slowing price growth.”
The ruble has strengthened against the dollar since Russian policy makers tightened policy a second time this year. The rebound helped pare this year’s decline to about 5 percent. It extended losses today after the announcement and traded 0.6 percent weaker at 34.6615 per dollar as of 6:46 p.m. in Moscow.
“Maintaining the current monetary policy stance will ensure a slowdown in consumer-price inflation to the target levels in the medium term,” the central bank said in the statement. “Taking into account that monetary policy influence on the economy is distributed over time, inflation slowing to the 5 percent target in 2014 is unlikely.”
The inflation rate may fall to about 6 percent by year-end, Nabiullina said today, adding that rate increases in March and April are still making an impact on price growth. Inflation may reach 8 percent in June, according to a June 6 report by the Economy Ministry.
Price growth accelerated to 7.6 percent in May from a year earlier after a 7.3 percent gain in April, remaining above the central bank’s 5 percent goal this year. It missed its target range of 5 percent to 6 percent last year. Inflation remained at 7.6 percent as of June 9, according to the central bank.
The regulator will “continue increasing the key rate” if “existing inflation risks materialize, and threats to medium-term inflation targets emerge,” according to its statement today.
Policy makers unexpectedly raised the key policy rate by 50 basis points to 7.5 percent in April after an emergency move to 7 percent from 5.5 percent in March, which at the time they said was temporary.
The tighter policy helped reduce “instability, uncertainty” in Russian financial markets “caused by the fear of sanctions,” central bank First Deputy Chairman Ksenia Yudaeva said in a June 5 Bloomberg Television interview in London.
Gross domestic product grew 0.9 percent in the first quarter from a year earlier, compared with 2 percent in the final three months of last year, dragged down by fading consumer spending and sagging investment.
The economy will expand as much as 0.4 percent this year, according to Nabiullina, which would be the slowest pace since a recession in 2009. The economy will recover “slowly” in the next two years, growing 0.9 percent next year and 1.9 percent in 2016, she said.
“As rates stay unchanged this time, the central bank reiterates its hawkish view as it sees inflation remaining high,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail. “Any acceleration in inflation to 8 percent could produce a new rate hike. As geopolitical risks remain, the ruble’s fast devaluation could trigger an unexpected rate hike any moment.”
To contact the editors responsible for this story: Balazs Penz at firstname.lastname@example.org Agnes Lovasz, Andrew Langley