Call It Predictable: Bank of Russia Puts Rate Hike in Play

  • Yudaeva says she can't `completely' rule out increase in rates
  • Central bank to update inflation forecasts at meeting in March

Charting a predictable path for the Russian central bank doesn’t exclude surprises.

As policy makers seek to map out the course for monetary policy, the Bank of Russia can’t “completely” rule out an interest-rate increase, First Deputy Governor Ksenia Yudaeva said Thursday in Moscow in an interview with Bloomberg Television. Inflation risks in Russia have intensified because of the weaker ruble, making the stance tighter than the central bank previously forecast, she said.

“We will look for an optimal and predictable path of the interest rate,” Yudaeva said. “We will try to do it after an assessment of the situation and making a new forecast of how it will develop.”

Policy makers are setting a new tone for the year after closing 2015 by repeating a promise to restart easing if price growth slows in line with their forecasts and inflation threats recede. With a recession at risk of extending into a second year and oil prices near a 12-year low driving renewed ruble weakness, the central bank is putting investors on alert that its pursuit of an inflation target will take precedence in crafting policy.

Target Pursuit

“We want to decrease inflation to 4 percent by the end of next year, and we will choose the policy which is appropriate with that,” Yudaeva said. “We will change our policy and adjust it in order to reach the target and also we will look at other risks.”

The Bank of Russia has kept its benchmark at 11 percent for the last three meetings, with consumer prices growing at more than three times its goal. Inflation slowed to 12.9 percent from a year ago in December after touching a 13-year high of 16.9 percent in March. It next reviews rates Jan. 29.

Yudaeva’s comments suggest the key rate will stay on hold for “much longer,” said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London.

“The central bank will not be able to resume its easing cycle until oil finally bottoms and the selling pressure on the ruble fades,” he said. “We may have to wait until the second half of the year before the Russian rate setters reduce the borrowing costs. If that is the case, the ongoing contraction in domestic demand will continue, as local banks are still cut off from the external source of funding.”

Volatility, FRAs

The ruble has weakened 20 percent against the dollar in the past three months, the third-worst performer among 24 emerging-market currencies tracked by Bloomberg. Its three-month implied volatility is the fourth-highest globally at 20.1.

Forward-rate agreements are signaling 16 basis points of cuts in the next three months, down from as much as a full percentage point of easing seen in November.

The central bank predicts consumer-price growth will ease to about 6 percent by end-2016, while the economy may contract as much as 1 percent with oil averaging at $50, according to its base-case scenario. The bank will update its inflation forecasts in March, Yudaeva said.

“Inflation risks have increased recently, so this basically means that the path of monetary policy will be somewhat tighter than we originally predicted,” she said. “We think it’s still realistic to reach our medium-term target by the end of next year. There’s a large probability that we’ll do that.”

Looser monetary policy may still be in the cards, according to Yudaeva.

“According to our forecast, we will be able to decrease rates sometime within
this year, next year, and we will be consistent with this strategy,” she said.

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