Russian Central Bank Seen Ignoring Inflation on Rate Move

Russia’s central bank will probably play down pressure from ruble losses and the fastest inflation reading in three years and keep rates on hold this month, according to economists from London to Moscow.

With the economy flirting with recession, a further shock to the currency, the worst performing in the world last quarter, may be the only thing that could force policy makers to raise the benchmark interest rate from 8 percent at their Oct. 31 meeting, banks including VTB Capital, ING Groep NV, JPMorgan Chase & Co. and Renaissance Capital said.

Consumer prices jumped 8 percent from a year earlier in September after the conflict in Ukraine triggered a ruble selloff, sanctions from the U.S. and European Union, and a retaliatory food import ban from Russia that drove up costs for Russians. Accelerating since President Vladimir Putin’s annexation of Ukraine’s Crimean peninsula in March, Russian inflation has prompted the central bank to raise its benchmark rate three times this year, from 5.5 percent in February.

“The cost-push inflation underway will likely prompt the central bank to preserve its tight stance,” VTB Capital economists Vladimir Kolychev and Daria Isakova said in an e-mailed note. “But given rising tolerance toward elevated inflation, we do not expect additional hikes unless extra shocks take place.”

‘Unpopular’ Increase

The ruble weakened 1 percent to 39.9570 per dollar in Moscow on Oct. 3 and 0.3 percent to 44.4471 against the central bank’s euro-dollar basket. The ruble was little changed versus the dollar today at 39.9500 as of 2:47 p.m. in Moscow after earlier slipping below 40 for the first time.

The central bank may count on the planned seven and 28-day currency repo facility for banks to relieve weakening pressure on the ruble and will “avoid the politically unpopular rate hike,” Anatoliy A Shal, JPMorgan Chase & Co.’s chief Moscow economist, said in a note.

Inflation will probably accelerate to 8.2 percent this year from a previous estimate of 7.5 percent, driven by higher risks from the ruble’s weakness, Oleg Kouzmin, an economist for Russia and the Commonwealth of Independent States with Renaissance Capital Ltd. in Moscow, said in an e-mailed note.

Oil Price

Headline inflation may peak at 9 percent if oil prices stay at $90-$95 per barrel, according to VTB Capital.

Russia, the biggest global oil exporter, relies for half its budget revenue from the sale of oil and natural gas. Brent oil is trading at $91.9 per barrel in London, the lowest level since June 2012.

In response to sanctions targeting Russia’s businessmen, companies and the energy, finance and weapons industries, Putin restricted imports of meat, fish, dairy, fruits and vegetables from the U.S., the EU, Canada, Norway and Australia for a year.

The sanctions have dragged down Russia’s economic growth, with the government estimating a 0.5 percent expansion this year after 1.3 percent in 2013. Prices will continue to increase this month, according to 83 percent of respondents in a Sept. 28 survey by the Public Opinion Foundation.

Russia will clearly miss inflation target of 5 percent of this year, Elvira Nabiullina, the central bank governor, said at an investment forum in Moscow Oct. 2. Policy makers estimate consumer-price growth will be about 8 percent this year, according to Nabiullina.

‘Transitory Shock’

“We don’t think the negative surprise in inflation would turn the central bank back to more hawkish rhetoric: we’ve already heard from the regulator that it saw the food price move as a transitory shock,” Dmitry Polevoy, the chief economist for Russia and the Commonwealth of Independent States at ING, said in an e-mailed note, adding that there’s “plenty of time for any surprises” before the central bank meeting.

The central bank will shift to inflation targeting and a ruble free-float starting next year. Policy makers are targeting 4.5 percent inflation in 2015 and 4 percent inflation in the medium term.

The ruble will “properly start its catching-up” when the central bank tightens policy, Benoit Anne, chief emerging markets strategist at Societe Generale, said by e-mail.

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