Catch-22 for Russia Means Most Tightly Contested Rates Decision

  • Ruble volatility complicates cuts by inflation-targeting bank
  • Goldman Sachs and Barclays analysts at odds over direction

Russian central bank Governor Elvira Nabiullina is about to make her most tightly contested interest-rate decision on Friday, with analysts divided on whether a reduction will sabotage her inflation goals.

In an even split, 19 analysts surveyed by Bloomberg as of Oct. 28 expect Nabiullina to reduce benchmark borrowing costs by at least 50 basis points to 10.5 percent, while the same number see her leaving them unchanged, the first time since the surveys started in October 2013 opinions have been so divided.

The chasm is a reflection of the tough job facing policy makers struggling to lower inflation that’s almost four times higher than their medium-term target while spurring an economy in the midst of a recession. The ruble’s swings aren’t making the decision any easier. While it’s rallied the most in emerging markets since the last rate decision on Sept. 11, reducing pressure on consumer prices, the currency gave up gains in a two-day slump this week.

"It’s a very, very close call," Piotr Matys, an analyst at Rabobank in London, said by e-mail. Matys expects the bank will cut by 50 basis points, a forecast he is ready to qualify. “Now the ruble is under selling pressure again and my own conviction that the central bank will indeed cut rates on Friday is fading."

Hawkish Shift

Even after slowing in September to 15.7 percent from 15.8 percent, the rate of consumer-price growth is close to a 13-year high. Goldman Sachs Group Inc. analysts Clemens Grafe and Andrew Matheny see a respite from inflationary pressures allowing policy makers to resume easing. They are forecasting a cut of 50 basis points Friday and 500 basis points over the next four quarters while acknowledging the reductions may be smaller.

“Recent central bank communication has nonetheless erred on the somewhat hawkish side, with comments that inflation expectations are rising,” Grafe and Matheny wrote in a note to clients this week. “This, in our view, introduces some risk that the central bank will hold its fire and refrain from cutting until its December meeting.”

A rate cut now could jeopardize the central bank’s inflation-targeting goal, according to Liza Ermolenko, an analyst at Capital Economics who sees no rate cut. Even though it hastened the economic downturn, Russian policymakers brought the benchmark to 17 percent in an emergency increase to shore up the ruble and restrain accelerating consumer-price growth in December 2014.

Stubborn Inflation

“The main thing for them is to ensure that inflation comes down from its current very high levels,” Ermolenko said. “Inflation is more stubborn than many had expected.”

That’s also the view of Daniel Hewitt, an economist at Barclays Plc in London, who said a falling ruble will prompt policy makers to avoid fanning inflation with a rate cut Friday, and instead restart easing in December.

The Russian currency tumbled 3.9 percent in the first two days of the week, and temporarily erased October’s rally on Wednesday. The ruble was down 0.8 percent at 11:31 a.m. in Moscow to 64.477 per dollar.

“A cut now will risk losing the rate-cut momentum as ruble weakness may reverse downward inflation trends,” Hewitt wrote in a note to clients Wednesday. “An inflation-targeting central bank cannot afford being too optimistic. It has to be disciplined and wait for inflation to decline before cutting rates.”

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