Russia Holds Rates First Time This Year After Ruble Plunge

  • Ruble's 45% drop against dollar is stoking inflation in Russia
  • Central bank looks past recession amid ruble, inflation risks

Russia’s central bank left interest rates unchanged for the first time this year after the ruble’s crash deepened with slumping oil prices, arresting an easing cycle that’s so far failed to reverse the nation’s first recession since 2009.

The one-week auction rate was kept at 11 percent, according to a statement on Friday. That matched the forecasts of all but three of the 36 economists surveyed by Bloomberg. The rest predicted a reduction. Governor Elvira Nabiullina will hold a news conference at 3 p.m.

The severity of the ruble’s plunge is taking precedence over the intensifying recession for the central bank, which also has to contend with possible monetary tightening by the U.S. Federal Reserve and the global fallout from China’s economic downturn. The devaluation since the previous meeting in July triggered faster inflation, which is almost fourfold the central bank’s mid-term target.

“The depreciated ruble will continue to put pressure on prices in the next few months,” the central bank said in the statement. “However, the relatively tough monetary conditions and slack domestic demand will drag down annual inflation.”

Ruble Slump

The ruble extended declines after the announcement and traded 0.4 percent weaker at 67.9350 versus the dollar as of 1:50 p.m. in Moscow. It’s the world’s worst performer in the past 12 months against the dollar with a 45 percent drop. The ruble’s three-month implied volatility, a measure of exchange-rate swings, is the highest globally at about 26 percent, according to data compiled by Bloomberg.

The Bank of Russia has almost rolled back last year’s emergency rate increase with five cuts since January, shaving six percentage points off its benchmark. The economy of the world’s biggest energy exporter shrank 4.6 percent in the second quarter from a year earlier after a 2.2 drop in the first three months.

“A weaker ruble limited room for maneuver to ease monetary policy further for the Bank of Russia,” Piotr Matys, a London-based emerging markets foreign-exchange strategist at Rabobank, said by e-mail. “Today’s decision should be seen as a pause rather than the end of the easing cycle. The outlook for Russia’s economy is bleak due to the prospect of lower for longer oil prices. The risk of prolonged recession increased after oil prices plummeted to a new year-to-date low in August.”

Deeper Recession

The central bank said it’s now forecasting an economic decline of 3.9 percent to 4.4 percent in 2015. Inflation, estimated at 15.8 percent as of Sept. 7, is set to slow to about 7 percent next September, it said. Oil prices will be at about $50 for the next three years, according to the central bank.

“The anticipated GDP contraction” for this year is “the key highlight,” Yury Tulinov, head of research at Rosbank PJSC in Moscow, said by e-mail. “The monetary policy rhetoric remains neutral but the central bank still believes in disinflation going forward.”

Turmoil on financial and commodities markets has forced the government to review its forecast for this year’s contraction just two weeks after it was downgraded to 3.3 percent. The cabinet also shortened its fiscal-planning horizon to one year from three for 2016 and plans to suspend the so-called budget rule, which capped public spending based on average long-term oil prices.

Inflation Outlook

While policy makers reiterated that they plan to achieve their 4 percent inflation target in 2017, annual consumer-price growth accelerated for a second month in August to 15.8 percent after reaching this year’s low of 15.3 percent in June. The current pace of price growth is “still assessed as very high,” according to the central bank’s last report on inflationary expectations.

The decision “improves further the central bank’s credibility, signaling that it keeps fingers on the pulse of markets and economy,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “The Bank of Russia is not too frightened by the increase in global volatility, ready to continue monetary easing on economic cooling.”

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