Bank of Russia Says Easing Over for 2016 After Second Cut

  • Key rate lowered to 10%, as forecast by 37 of 42 economists
  • Central bank says risks of missing 4% inflation target persist

Russia’s central bank reduced borrowing costs after a three-month pause and said its key interest rate will probably remain on hold for the rest of the year to keep a lid on prices before easing can resume again.

While Governor Elvira Nabiullina conceded that another decrease this year can’t be completely ruled out, she said it’s “extremely unlikely,” with the central bank committing for the first time to follow such a distinct rate path. The one-week auction rate was lowered to 10 percent from 10.5 percent, according to a statement on Friday. Thirty-seven of 42 economists surveyed by Bloomberg predicted the move, while five saw no change.

“There’s a chance, of course, but only in case of significant deviations from our baseline scenario for the better,” Nabiullina told reporters in Moscow after the decision. “We don’t see the likelihood of that.”

Click here to watch Nabiullina’s news conference in full.

The Bank of Russia has its reputation on the line as it looks to rein in inflation to 4 percent by the end of 2017 after overshooting its price forecasts in 2015 for a fourth year. Market participants had forecast rates to fall at a faster pace than anticipated by the central bank while their outlook for inflation exceeded the goal, so policy makers had to act to contain expectations, according to Nabiullina.

‘Hawkish Easing’

“We can add a new phrase when commenting about the monetary policy in Russia: ‘hawkish easing,’" said Piotr Matys, a currency strategist at Rabobank in London. “It’s not only about the outlook for inflation and the real economy, but we also see the risk of excessive capital inflows fueled by an attractive ruble carry trade as the central bank is clearly reluctant to cut rates far more aggressively.”

The strategy of buying Russia’s currency using borrowed dollars returned more than 21 percent this year, the best result after Brazil, according to data compiled by Bloomberg. That has sent the ruble on a 13 percent rally against the dollar in 2016, behind only Brazil’s real and the yen globally, according to data compiled by Bloomberg. The Russian currency trimmed losses after the decision and traded 0.5 percent weaker at 65.07 against the dollar as of 3:40 p.m. in Moscow. 

Derivatives traders further scaled back their bets for a rate cut in the next three months after the announcement. Forward-rate agreements fell to 29 basis points, down from this month’s high of 71 basis points.

On Hold

“The current key rate needs to be maintained until end-2016 with a possibility to cut” in the first or second quarters of 2017, the central bank said in the statement. “The risks of failure to deliver inflation at the 4 percent target in 2017 persist mainly due to the inertia of inflation expectations and potential weaker household saving motives.”

Nabiullina said in an unscheduled speech last week that the Bank of Russia will continue its “moderately tight” monetary policy, with the inflation rate now below its benchmark for the past eight months. Warning that positive real rates are “a new reality” for Russia, the central bank wants to encourage higher savings and their transformation into investment while pushing companies to streamline their businesses instead of counting on price increases.

Its goals are aligning with the government’s aim to shift to an investment-growth model after the crash in oil and the ruble crisis pushed the economy into the longest recession in two decades. Lauded by Morgan Stanley as the “most orthodox” central banker in developing Europe, Nabiullina said the benchmark rate can exceed headline inflation by more than 2 1/2 to three percentage points to anchor expectations before and even some time after price growth reaches the target.

Inflation, Expectations

Consumer-price growth eased to 6.9 percent in August from a year earlier, the lowest rate since March 2014. Inflation expectations, which central bankers often cite as one of the main obstacles for disinflation, fell noticeably in August to the lowest in almost two years.

The central bank worsened its outlook for economic growth next year to less than 1 percent, compared with gains of 1.1 percent to 1.4 percent seen in June. It estimates inflation was at 6.6 percent from a year earlier on Sept. 12, predicting price growth will reach 4.5 percent next September before slowing to the 4 percent target in late 2017.

Economists surveyed by Bloomberg see inflation slowing to 6.3 percent by the end of this year and forecast the economy will expand 1.3 percent in 2017, returning to growth after two years of contraction.

While “the decision is very welcome, the overcautious tone is disappointing,” said Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki. It “seems that the central bank’s stance of ‘4 percent CPI at any price in 2017’ is still holding.”

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