Oil Rout Sets Bank of Russia Adrift as Ruble Stifles Easing

When Will Russia and OPEC Cut Oil Production?
  • Key rate to stay at 11%, according to all economists in survey
  • Central bank has held benchmark for 3 meetings after 5 cuts

The Bank of Russia’s response to the collapse in oil prices and the ruble’s plunge to a record may come down to what it doesn’t say after a meeting on Friday.

After vowing in October and December to resume its easing cycle during the three nearest meetings, the central bank may now opt to drop or soften that commitment, according to Capital Economics Ltd. and Societe Generale SA. Bank of America Corp. believes the policy statement will “retain a dovish stance.” All 42 economists surveyed by Bloomberg predict the key interest rate will be held at 11 percent for a fourth straight meeting on Friday.

“We are more likely to see them take out comments committing to lowering rates in the future,” said William Jackson, a senior emerging-market analyst at Capital Economics in London. “They probably don’t want to do more than that given the uncertainty.”

The worst oil crash in a generation is rippling through the economy of the world’s biggest energy exporter, forcing policy adjustments that range from spending cutbacks to a further delay in timing of the next rate decrease after five reductions last year. Even with gross domestic product contracting for the first time since 2009, First Deputy Governor Ksenia Yudaeva said this month the Bank of Russia couldn’t “completely” rule out an increase in borrowing costs, signaling that its pursuit of an inflation target of 4 percent will take precedence in crafting policy.

Downgrading Outlook

“The central bank will likely try to downgrade its outlook as cautiously as possible, for example by entering a silent period, or try to sound conditional,” said Evgeny Koshelev, an analyst at Societe Generale’s unit Rosbank PJSC in Moscow. “Frontier outcomes, like threats to tighten policy or abandon easing, are highly unlikely.”

Forward-rate agreements are signaling 10 basis points, or 0.10 percentage point, of increases in borrowing costs in the next three months, after indicating as much as 1 percentage point of easing in November. The ruble has lost almost 4 percent against the dollar this year, the second-worst performer among its peers in developing Europe after Poland’s zloty, according to data compiled by Bloomberg.

As swings in the oil market whipsawed the ruble last week, Governor Elvira Nabiullina said the central bank has the tools to act “proactively” and wants to avoid “excessive” fluctuations in the exchange rate.

Delivering Target

The Bank of Russia’s guidance will “be indicative of the future path of interest rates,” VTB Capital analysts Alexander Isakov and Petr Grishin said in a note. “While the tone is all but guaranteed to become more hawkish, the guidance might hint at the level of the central bank’s commitment to delivering 4 percent inflation in 2017.”

While the central bank is backed into a corner for now, what’s not in dispute is that substantial scope remains for monetary easing. The recession-hit economy needs relief after GDP contracted 3.7 percent last year amid plunging investment and consumer demand.

The probability of the economy remaining in recession in the next year increased to 80 percent from 65 percent a month ago, according to analysts polled by Bloomberg. GDP will contract 0.7 percent this year, worse than last month’s forecast for a 0.5 percent decline, the survey showed.

Easing Ahead

If oil prices stabilize and then recover in the third quarter, the central bank may deliver as much as 250 basis points of cuts by end-September, according to BofA. Under ING Groep NV’s base-case scenario, the benchmark may drop to as low as 8 percent by the end of 2016. The key rate will end the year at 9.5 percent, according to the median estimate in a Bloomberg survey of economists.

A rate pause this month would mean that Russia’s inflation will drop below the central bank’s benchmark for the first time in a year. Annual price growth, which eased to 12.9 percent in December, is set to slow near 10 percent in January.

Policy makers, who last cut rates in July, will announce their decision on Friday at about 1:30 p.m. in Moscow.

“If severe market volatility continues, we think the start of the expected monetary easing by the Bank of Russia could be postponed until later in the year,” said BofA economist Vladimir Osakovskiy.“However, as inflation will likely price in the full extent of the recent ruble weakness in the next two to three months, we think the central bank could be more open to a rate cut at its March policy meeting.”

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