Russia’s High Real Rates Worth It for Fitch in Credibility Boost

The toll on Russia’s economy leveled by high real interest rates is worth paying because of the boost to central bank credibility, according to Fitch Ratings.

“It’s a short-term cost, but once you have central bank credibility, that’s clearly a long-term benefit for the economy,” Paul Gamble, a senior director at Fitch, said in an interview in Moscow on Wednesday. “High real rates would have a potentially negative impact on growth. For us, the more important thing is establishing the credibility of the inflation-targeting regime and any impact on growth would be more than offset by enhancing central bank credibility.”

The Bank of Russia has kept its benchmark above inflation for the past eight months, leaving the recession-hit economy with the world’s second-highest real rates. With annual price growth at 6.9 percent in August, the slowest in more than two years, the median value of inflation expectations remains at more than triple the central bank’s 4 percent target for next year. Policy makers overshot their price forecast in 2015 for a fourth consecutive year.

“Actually hitting 4 percent by the end of next year is going to be difficult,” Gamble said. “But getting closer to 4 percent is certainly achievable.”

As expectations mounted that the central bank on Friday will cut interest rates for the second time this year, Governor Elvira Nabiullina broke her two-month silence on monetary policy last week to deliver an unscheduled speech, vowing to maintain a “moderately tight” stance and promising no relief to businesses any time soon.

‘Important Condition’

Keeping real rates stably in positive territory is an “important condition for healthy economic growth,” according to Nabiullina, who previously pledged to keep the benchmark rate up to three percentage points above headline inflation to anchor expectations.

Derivatives traders have scaled back their wagers for a rate cut in the next three months. Forward-rate agreements signaled 47 basis points of decreases on Wednesday, near the lowest in two weeks. That’s down from 71 basis points on Sept. 1.

All but five of the 42 economists surveyed by Bloomberg say the central bank will cut its key rate to 10 percent on Sept. 16, with the rest predicting it will stay at 10.5 percent. In June, policy makers reduced their benchmark for the first time in almost a year, cutting it by half a point.

“It is not easy to get credibility,” Gamble said. The Bank of Russia’s “track record has been very good.”

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