Russian Rate Wait May Last Months as Nabiullina Cautions on Cuts

  • Central bank to consider resuming cuts at 3 nearest meetings
  • Bank of Russia has paused easing for two months after 5 cuts

The Bank of Russia left open the possibility of keeping its interest rates on hold until its meeting in March, with Governor Elvira Nabiullina warning that rushing to trim borrowing costs may create risks that will force policy makers to backpedal.

The central bank, which has kept is key rate unchanged for two months, said Oct. 30 that monetary easing may resume at “one of its forthcoming” meetings if inflation slows in line with its forecasts. That timeline encompasses the “nearest three meetings,” Nabiullina told reporters on Friday in Moscow. The board of directors is next scheduled to review rates on Dec. 11, Jan. 29, and March 18.

The resumption of the easing cycle has become a moving target after a bout of ruble weakness reignited inflation, keeping it almost fourfold the central bank’s medium-term goal of 4 percent. Policy makers left their key rate at 11 percent after five cuts almost unwound an emergency increase to 17 percent in December.

“By cutting the rate too quickly now, we may create risks that rates will start rising in the future,” Nabiullina told lawmakers on Friday. “We shouldn’t let that happen.”

Forward-rate agreements show traders are seeing 70 basis points of reductions in three months, down from 80 two days ago. The key rate will end next year at 8 percent, according to the median estimate of economists surveyed by Bloomberg.

“Nabiullina described this horizon thinking that at the end of the first quarter, the situation will be more clear from the point of view of external shocks,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said by phone. “They need to be confident about any reduction.”

Reaching the goal of slower inflation shouldn’t damage the economy, which is facing a second year of recession and is strongly affected by global uncertainty, according to Nabiullina. Annual inflation eased to 15.6 percent in October from a 13-year high of 16.9 percent in March.

While price growth remains fast, it will slow quickly as the impact of the ruble’s depreciation wears off, Economy Minister Alexei Ulyukayev said Friday. Gross domestic product may contract 3.7 percent or 3.8 percent in the fourth quarter from a year earlier, he said in an e-mailed statement. GDP shrank 4.1 percent in the third quarter.

Easing ‘Foundation’

“Inflation’s slowdown is the foundation for the central bank to gradually reduce the key rate,” he said. “Rates for end borrowers will have to go down with it, and that will also aid the recovery in economic growth.”

The central bank’s head said that the pace of the rate increase by the U.S. Federal Reserve creates uncertainty and the change may spur outflows from emerging markets, including Russia. An oil-price decline and the slowdown in China’s economy are also among the main external risks for Russia, Nabiullina said.

“Deciding on interest rates right now, we need to take into consideration the current and future risks to economic growth and inflation,” Nabiullina said, reiterating that the central bank is on track to reach its 4 percent inflation target by end-2017.

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