Central Bank Gets the Last Word After Putin Cameo in Ruble Drama

  • Putin’s ruble comments won’t affect rate decision, survey says
  • Bank of Russia seen keeping its key rate at 10.5% after cut

President Vladimir Putin just gave his central bank another reason to stand pat.

The Bank of Russia will keep its benchmark interest rate at 10.5 percent on Friday, according to 29 of 39 economists in a Bloomberg survey, with the rest predicting a 50 basis-point cut. The president’s expression of unease about ruble strength at a time of oil volatility won’t affect its move, according to 15 of 18 analysts in another poll. The decision will be announced at 1:30 p.m. in Moscow.

“Obviously the central bank can’t and won’t ease interest rate policy to directly steer the ruble, especially not after Putin’s comment, as this would hurt its reputation as an ‘inflation targeter,”’ said Andreas Schwabe, an economist at Raiffeisen Bank International AG in Vienna.

The run-in with the government over the exchange rate last week highlighted the competing priorities pulling at Russia as it emerges from a recession, with finances hobbled by lower energy prices and inflation expectations still high. Policy makers can now make a show of independence after already reducing borrowing costs last month for the first in almost a year, when Governor Elvira Nabiullina stopped short of signaling the start of a new easing cycle.

Ruble, Oil

The question of weakening the exchange rate may be moot after the ruble dropped with oil over the last two weeks. It retreated against the dollar during seven of the last eight days. The Russian currency is still up more than 10 percent this year after a 20 percent loss in 2015.

Government policy was the object of Putin’s remarks, a central bank official said last week. The president hasn’t instructed the Bank of Russia to weaken the exchange rate, the person said.

A depreciating ruble would put pressure on the cost of imports, with inflation almost double the central bank’s target of 4 percent after June showed the first increase in the annual price index since August. Inflation expectations for a year ahead rose in June for the first time in five months.

The risk that inflation will miss the target in 2017 remains at an elevated level, according to the central bank. The Bank of Russia in June said it will “consider the possibility” of further easing if inflation is in line with forecasts and based on estimates of risks to price growth.

“If the central bank has proven one thing over the last two years, it’s that it’s ultimately guided by well-reasoned economics, not politics,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “The free float is good for the Russian economy because it allows the ruble to function as a cushion against shocks.”

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