Russia Balks at Rate Cuts as Ruble Adds to Inflation Risks

  • Decision to hold rates forecast by 29 of 39 surveyed analysts
  • Weaker ruble, wage growth raise risks to 4% inflation target

Russia’s central bank left borrowing costs unchanged after a cut last month as a weaker ruble compounded the risks that inflation will exceed next year’s target amid uncertainty over wages and budget policy.

The one-week auction rate will remain at 10.5 percent, policy makers said in a statement on Friday, matching the forecasts of 29 of 39 economists in a Bloomberg survey. The rest predicted a reduction by 50 basis points.

“The Bank of Russia will consider the possibility of a further rate cut based on estimates for inflation risks and the alignment of a decline in inflation with the forecast trajectory,” it said.

By holding off on further easing after the first decrease in almost a year, Governor Elvira Nabiullina can watch the impact on inflation of what could be the ruble’s worst month since December as oil retreats toward $40 a barrel. The rate meeting was also a chance for a show of independence for the central bank, whose free-float policy was called into question last week after President Vladimir Putin expressed unease about ruble strength at a time of oil volatility.

“The arguments are in favor of keeping rates unchanged: inflation is still above 7 percent, with wage increases topping it, budget uncertainty still remains high and the ruble is weakening,” Artem Arkhipov, chief economist for Russia at ZAO UniCredit Bank in Moscow, said by e-mail before the decision. “A rush with rates may reduce the central bank’s capability for maneuver at the next meetings.”

Ruble, Oil

The ruble pared its losses after the announcement and traded 0.5 percent weaker at 66.9225 against the dollar. It’s still the world’s sixth-worst performer this month after retreating against the dollar during eight of the last nine days. The Russian currency is up almost 10 percent this year after a 20 percent loss in 2015. Oil in June is headed for its biggest monthly decline in a year.

With the economy nearing the end of recession, the Bank of Russia is again turning its focus to inflation risks. The ruble’s depreciation makes harder the task of slowing price growth to 4 percent in 2017 after it quickened in June to almost double the target, ticking up for the first time in 10 months as nominal wages rose faster than prices.

Prices rose 7.5 percent from a year earlier last month, followed by an increase in inflation expectations for the first time since January. Nabiullina stopped short of signaling the start of a new easing cycle after the rate cut in June, although policy makers said they will “consider the possibility” of further easing if inflation is in line with forecasts and based on estimates of risks to price growth.

Budget Risk

The price target also remains under threat from uncertainty over fiscal policy. While the government agreed to freeze budget spending in the next three years at the 2016 level, the cabinet continues discussing expenditure. 

Improved relations with Turkey may be paving the way for authorities to ease restrictions on food imports, which VTB Capital estimates would result in a “favorable supply-side shock to inflation” of 0.3 percentage point.

“Fiscal policy and international relations indicate the potential for downward pressure on price growth, but these developments are still removed in time and uncertain,” VTB Capital economists including Alexander Isakov said in a report.

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