`Most Orthodox' Banker Seeks More Clues Than Bonds and Cucumbers

  • Bond-rate gap near 11-month wide shows market ready for cuts
  • Nabiullina's strict adherence to CPI target means longer wait

The most orthodox central banker in developing Europe is dismissing signals from everything from the bond market to the price of cucumbers that it’s time to cut interest rates.

Russian central bank governor Elvira Nabiullina will keep benchmark borrowing costs at 11 percent on Friday, where they’ve been since July 31, according to the median estimate of 26 economists surveyed by Bloomberg. Even though inflation has slowed to a two-year low, she wants to see more evidence prices have stabilized before restarting an easing cycle to relieve an economy in its second year of recession, according to Capital Economics in London.

It’s policies like this that led Morgan Stanley to designate Russia’s central bank as the “most orthodox” in central Europe in a model that scored countries based on how much inflation deviates from official targets. Nabiullina stands out from peers in emerging Europe who attach a lower priority to price stability, such as Turkey and Hungary, which ranked as the most unorthodox.

“There’s been a big move towards more orthodox policy-making under Nabiullina and that may pay dividends in the future,” said William Jackson, a senior emerging-markets economist at Capital Economics, who said the Bank of Russia is likely to hold off on rate cuts until the second half. “They’re trying to be extremely rigorous about what they can control. The central bank is stressing they won’t quickly react to changes in food prices.”

Cucumbers, Potatoes

Recently, Nabiullina’s inflation-targeting efforts have been helped by the falling cost of groceries after an abundant spring harvest that drove down the price of cucumbers by 9.7 percent in March, and potatoes by as much as 3.4 percent, even as other goods became more expensive. Consumer-price growth slowed more than forecast that month to 7.3 percent, after tumbling from 16.9 percent a year earlier.

Bonds show investors are positioning for rate reductions. The gap between five-year bond yields and the central bank key rate was 170 basis points, near the widest since May. The yield on the government debt added two basis points to trade at 9.3 percent at 11 a.m. in Moscow.

The central bank’s strict observance of inflation comes after a recent history of missed goals. Last year, policy makers overshot their target for a fourth consecutive year and previously conceded they may fall short of the 4 percent goal for 2017 after turmoil in the oil market and the ruble. While inflation has declined every month since September, Morgan Stanley economists predict it will accelerate until August as the base effect from last year’s rampant growth fades, before slowing again.

“They are fixated on inflation, they want 4 percent at any price," said Vladimir Miklashevsky, senior strategist at Danske Bank A/S, who expects no change in interest rates this week.

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