Bank of Russia Seen on the Cusp of Easing as Analysts Split

  • Analysts almost evenly split over prospect of easing on Friday
  • Inflation unchanged during 3 months, pushing real rates higher

Sometimes no change isn’t an option.

Leaving Russian borrowing costs on hold for an 11th month would amount to policy tightening by the central bank after inflation stabilized and remained on track to slow later in 2016, pushing real interest rates to the highest in more than a year. That’s one reason 16 more economists are forecasting a decrease on Friday than predicted it before the last meeting in April. Twenty-one of the 43 analysts surveyed by Bloomberg still say the pause will continue.

“By keeping the rate flat and continuing to reduce inflation forecasts, the regulator is gradually starting to send the wrong signals as that means a tightening of policy,” said Evgeny Koshelev, an analyst at Societe Generale SA’s Rosbank PJSC unit in Moscow. “However, there’re no necessary reasons for that.”

The divide among economists goes to the heart of the dilemma facing the Bank of Russia. While in April it held out the prospect of a cut at one of its “forthcoming” meetings, policy makers have since signaled they’re in no rush to ease and believe rate decreases won’t do much for the recession-hit economy.

Governor Elvira Nabiullina will hold a news conference after the Bank of Russia announces its decision at 1:30 p.m. in Moscow.

With the economy in contraction since the start of 2015, there’s now a stronger case for monetary easing, according to ING Groep NV.

“We don’t have significant signs that the economy has started to recover,” said Dmitry Polevoy, chief economist for Russia at ING in Moscow. “The current level of real rates -- either in relation to expected or actual inflation -- remains high for the economy.”

From the outlook for oil to the currency market, little has changed in the backdrop since policy makers last reviewed borrowing costs. But appearances can be deceiving.

The price threats the central bank called “elevated” are no less alarming now, from fiscal uncertainty to high inflation expectations. While the ruble has stabilized, it’s lagged the gains in oil since the April meeting, falling less than 1 percent against the dollar compared with an increase of almost 7 percent for Brent crude.

‘Ruble Weakness’

For Sberbank CIB, that “hints at underlying ruble weakness” and a possible hurdle to a rate cut on Friday.

Economists at lenders including Morgan Stanley and Danske Bank A/S say the same rationale that led to a hold in April applies equally well to this month’s decision.

“The majority of inflation risks highlighted in the April statement remain unresolved,” Morgan Stanley economist Alina Slyusarchuk said in a report. “We expect the Russian central bank to remain cautious.”

Monetary easing remains a question of when, not if. Forward-rate agreements are signaling 70 basis points of decreases in borrowing costs during the next three months, the most since March.

While the Bank of Russia warned 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. A possible increase in inflation predicted by the central bank in May-June has so far failed to materialize.

Annual price growth remained at 7.3 percent for a third month in May, the slowest since 2014 and almost double the 4 percent target. That’s less than half the level of inflation in July 2015, when the central bank last cut rates. Consumer prices didn’t change in the seven days to June 6, the first week they failed to grow since August.

“Inflation continues to surprise everybody in a good way,” said Oleg Kouzmin, chief economist for Russia at Renaissance Capital.

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