Ruble Seen Near Tipping Point as Russian Rate Pause Drags Onby
Currency gain of 7% is top trigger for rate cut, survey shows
Central bank has paused since July amid turmoil in oil, ruble
Look to the ruble for clues about the Russian central bank’s path to restarting the easing cycle it froze nine months ago.
The currency’s gain of about 7 percent to 60 against the dollar would be the single biggest factor in favor of an interest-rate cut already this quarter, according to 27 percent of the 30 economists surveyed by Bloomberg. Inflation not accelerating in the next few weeks was ranked second. Six of 41 analysts in a separate poll forecast a 50 basis-point decrease when the central bank meets on Friday, with the rest predicting the key rate will remain at 11 percent.
The world’s biggest currency rally in the past three months has the potential to trigger the first rate cut since July as oil prices stabilize and inflation expectations continue to ease. Governor Elvira Nabiullina is debating the timing with the economy in recession for a second year and consumer prices running below an annual 8 percent for the first time since mid-2014.
“If the ruble remains on the stronger side for longer, also based on a favorable oil development, there could be earlier cuts,” possibly even starting on Friday, said Andreas Schwabe, an economist at Raiffeisen Bank International AG in Vienna. “Inflation came down quicker on almost no ruble pass-through, which has been a positive surprise for us, but inflation expectations are still elevated.”
The rate pause, which has now extended through five meetings, followed five reductions last year that brought the benchmark down from 17 percent. The ruble closed just below 60 against the dollar the day before the central bank last lowered borrowing costs on July 31. It traded 1.2 percent stronger at 64.3620 against the dollar as of 8:36 p.m. in Moscow.
The Russian currency has stabilized near 65 in April, and it can “move decisively” to a stronger level in the coming weeks if the central bank maintains its tough rhetoric on Friday and risk sentiment is positive, according to Tom Levinson, senior foreign-currency and rates analyst at Sberbank CIB in Moscow. That would make the prospect of a cut at the following meeting on June 10 “more realistic,” he said.
“The Russian central bank will be very wary of an excessively strong ruble,” said Per Hammarlund, the chief emerging-market strategist at SEB SA in Stockholm. It “knows that Russia has a rare opportunity to diversify its economy away from its heavy dependence on oil and gas. An overly expensive ruble would increase imports, leaving the import-substitution policy in tatters.”
Ten of 20 economists in another Bloomberg poll, conducted April 22-27, forecast the key rate will end this quarter below 11 percent. Forward-rate agreements are signasignaling ling 14 basis points of decreases in borrowing costs during the next three months.
Oil around $50 to $60 a barrel, which should correspond to the ruble’s 55-65 range against the dollar, “seems a good point to resume easing without either compromising ruble stability or the inflation outlook,” said Cristian Maggio, the London-based head of emerging-market research at Toronto Dominion Bank.
Lingering uncertainty, however, means “the bank may rather err to the cautious side and wait for the dollar-ruble pair to fall below 60 before acting again,” he said.
With oil prices at the highest level in more than five months, the central bank’s reluctance to cut rates is stoking demand for the ruble. It’s appreciated more than 14 percent this year after a 20 percent loss in 2015.
“It’s likely that we are up for some positive surprises in the second quarter,” said Nerijus Maciulis, chief economist at Swedbank AB in Vilnius, Lithuania. “The ruble will strengthen to 60, budget pressures will ease and interest rates will be cut.”
The central bank’s purchases of foreign currency to rebuild reserves, suspended since last July, would only come after rate cuts, according to Bank of America Corp., which predicts a hold on Friday.
While the Bank of Russia warned after the last meeting in March that its “moderately tight” monetary policy may last longer than previously planned, Nabiullina said that won’t preclude rate cuts if actual inflation falls faster.
Even so, risks abound. Inflation expectations, while easing in March for a second month, decelerated at a slower pace, according to the central bank. While the annual price index fell in March to 7.3 percent, its lowest in almost two years, prices had their biggest weekly advance since early March in the seven days through April 18.
Nabiullina warned last week that after slowing for seven months, inflation was at risk of stalling at 6 percent to 7 percent, a level she called “unacceptable” for speeding up the economy.
Economy Ministry forecasts, backed by the government last week, show inflation will end this year at 6.5 percent and won’t reach 4 percent until 2019, two years later than targeted by policy makers. The rate is currently running at 7.2 percent, according to the governor.
Monetary easing remains a question of when, not if. A real interest rate of near 4 percent is “almost unrivaled,” especially for an economy that’s continuing to contract, according to Sberbank CIB’s Levinson. For Ivan Tchakarov, an economist for Russia at Citigroup Inc. who didn’t participate in the survey, the central bank’s policy is “increasingly untenable” as high real rates thwart a recovery.
“Monetary policy has now transitioned from moderately tight to extremely tight,” he said.