Photographer: Simon Dawson/Bloomberg

The ‘Unacceptable’ Inflation That May End Russian Rate Pause

  • Price growth was at 7.3% for third month, in line with survey
  • Central bank reviews rates on Friday after pausing since July

The level of inflation Bank of Russia Governor Elvira Nabiullina just deemed “unacceptable” is looking better by the day.

So much so that its failure to accelerate in May could force the central bank’s hand to ease policy for the first time in almost a year when it reviews interest rates this week. Price growth was unchanged for a third month at 7.3 percent from a year earlier, the slowest since 2014, the Federal Statistics Service said on Monday. That matched the median of 20 estimates in a Bloomberg survey.

“Inflation continues to moderate on the back of declining inflation expectations and broader economic weakness,” Citigroup Inc. economists Ivan Tchakarov and Ekaterina Vlasova said in a report before the data release. “Positive inflation developments and, in our view, very high real rates argue strongly for initiating a rate-cutting cycle.”

While risks abound and policy makers focus on building their credibility after shifting to inflation targeting, a possible uptick in price growth forecast by the central bank is so far failing to materialize. The respite, combined with stabilizing oil and the ruble’s comeback this year, may tip the balance in favor of a rate cut even as inflation remains almost double the 4 percent goal.

Too High

Nabiullina warned in April that inflation was at risk of stalling at 6 percent to 7 percent, which she said was too high to revive economic growth and investment. Policy makers overshot their target in 2015 for a fourth consecutive year and have previously conceded they risk missing next year’s goal after turmoil in the oil market and the ruble. Economy Ministry forecasts show inflation will end this year at 6.5 percent and won’t reach 4 percent until 2019.

Forward-rate agreements signaled 50 basis points of decreases in borrowing costs during the next three months, compared with 14 basis points of cuts seen before the central bank’s meeting in April. The ruble is this year’s second-best performer among its emerging-market peers with a gain of more than 12 percent against the dollar. The Russian currency was 0.4 percent stronger at 65.3375 versus the dollar as of 3:18 p.m. in Moscow.

Twelve of 25 economists in a Bloomberg survey predict the key rate will be cut on Friday to 10.5 percent from 11 percent, with the rest forecasting no change.

Economy, Inflation

As the outlook improves for the recession-hit economy, shaking the central bank’s resolve won’t be easy. It’s alert to threats ranging from elevated inflation expectations and increases in nominal wages to lingering uncertainty over the budget.

“We have to take any risk into account in a way that fits into conservative policy, with everything being equal,” Igor Dmitriev, head of the monetary policy department at the Bank of Russia, said in an interview.

With consumer demand showing little sign of snapping out of its worst drop under President Vladimir Putin, the spare capacity created by the recession will help keep a lid on prices, according to Capital Economics Ltd.

“There’s more general weakening in the underlying price pressures,” said Liza Ermolenko, a London-based analyst at Capital Economics. “Spare capacity in the economy, coupled with weaker demand, should ensure that inflation will rise only a little bit over the next few months.”

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