Russia Seen Leaving Main Rate Unchanged as Ruble Rebounds

Russia’s central bank, which has raised borrowing costs twice in 2014, will probably leave its main interest rate unchanged with inflation set to peak this month and the ruble recovering from a five-year low.

Policy makers will leave the benchmark one-week auction rate at 7.50 percent today, according to all 27 economists in a Bloomberg survey. The bank is due to announce the decision at about 1:30 p.m. in Moscow, to be followed by a news conference.

Russia’s central bank, led by Chairman Elvira Nabiullina, has raised the benchmark by 200 basis points since February as a standoff with the U.S. and its allies over Ukraine intensified. The effort has stemmed declines in the ruble triggered by the threat of wider economic sanctions, making the currency the best performer in emerging markets since the April 25 rate move.

“A lack of pressures on the ruble” to depreciate “decreases the likelihood of another hike,” Tatiana Orlova, senior economist at Royal Bank of Scotland Group Plc in London, said in an e-mail. “At least it removes the case for a 50 basis-point hike.”

The ruble has been the best performer among 24 emerging-market currencies tracked by Bloomberg since Russian policy makers tightened policy a second time this year, strengthening 4.7 percent against the dollar. The rebound helped pare this year’s decline to 4.5 percent. It fell 7.8 percent in the first four months.

Unexpected Move

Policy makers unexpectedly raised the key policy rate by 50 basis points to 7.5 percent in April after an emergency move to 7 percent from 5.5 percent in March, which they at the time said was temporary.

The tighter policy helped reduce “instability, uncertainty” in Russian financial markets “caused by the fear of sanctions,” central bank First Deputy Chairman Ksenia Yudaeva said in a June 5 Bloomberg Television interview.

The inflation rate will probably peak in June, then fall to about 6 percent by year-end, partly due to the recovering currency, she said in London. Inflation may reach 8 percent in June, according to a June 6 report by the Economy Ministry.

Price increases accelerated to an annual rate of 7.6 percent in May from 7.3 percent in April. The central bank targets 5 percent after missing its goal of 5 percent to 6 percent last year.

“The central bank will focus on explaining the link between ruble depreciation and inflation in the statement,” Natalia Orlova, chief economist at Alfa Bank, said by phone.

While the odds of more rate increases have diminished, monetary easing isn’t on the agenda “in the coming months” even with economic growth at a four-year low, according to the central bank’s April 25 post-meeting statement.

Inflation Expectations

Gross domestic product grew 0.9 percent in the first quarter from a year earlier, the slowest pace since a 2009 recession, dragged down by fading consumer spending and sagging investment. The economy will expand as much as 0.5 percent this year, the government estimates.

“The nature of the slowdown in economic growth is mainly structural,” Nabiullina said May 23. With a low unemployment rate and limited spare capacity in the economy, the risk is that rate cuts may boost inflation, she said.

Inflation expectations have been increasing. Eighty-four percent of Russians see prices rising further, according to a poll published June 7 by the Public Opinion Foundation.

The deceleration of inflation will be “very slow” and the rate may be 6.3 percent to 6.5 percent at year-end, Evgeny Koshelev, an analyst at OAO Rosbank in Moscow, said by e-mail.

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