Goldman Sachs Group Inc. says Russian monetary policy is now little more than a function of oil prices. Here’s why a 12 percent gain in crude since the central bank last reviewed interest rates probably won’t sway policy makers when they meet on Friday.
With the benchmark on hold at 11 percent since July, Governor Elvira Nabiullina is coming off a surprise warning in January that the Bank of Russia may tighten policy if inflation risks intensify. Slowing price growth may indeed be grounds for monetary easing, but not when inflation expectations have barely budged.
Inflation, while decelerating for the past six months, remains at more than twice the central bank’s target of 4 percent and may accelerate in the second quarter. The central bank has already conceded it may “deviate” from its goal in late 2017 after turmoil in the oil market and the ruble.
The situation on the oil market also goes beyond the recent price recovery. While Brent futures have risen about 40 percent from the 12-year low of $27.10 reached in January, world crude benchmarks may struggle to push past $50 a barrel this year as any further price rebound only delays the production cuts needed to balance the market, according to the median of a Bloomberg survey of nine analysts.
Unlike other nations, where cheap commodities are a drag on prices, a drop in oil weakens the ruble and makes imports more expensive, stoking inflation in Russia. The government, which relies on energy for more than 40 percent of fiscal revenue, is now reviewing this year's budget, currently based on an average oil price of $50 a barrel.
Bottom line: the Bank of Russia may tinker with its rhetoric on Friday, but Nabiullina will stand pat on rates. Thirty-five of 41 economists surveyed by Bloomberg predict no change. The rest forecast a 50 basis-point cut.
--With assistance from Milda Seputyte, Zoya Shilova and Anna Andrianova.