Russian Inflation Hews to Central Bank View as Slowdown Persists

  • Inflation eased to 6.4% last month, better than most forecasts
  • Bank of Russia vowed to hold rates to meet its 4% price target

Bringing intrigue back into Russian monetary policy is a tall order.

In a region littered with broken promises by central banks, Russia’s Governor Elvira Nabiullina just made an unprecedented pledge to leave interest rates unchanged the rest of the year. Should Russian inflation continue to surprise after decelerating to a 31-month low of 6.4 percent in September -- slowing more than estimated by economists and at the lower end of the central bank’s forecast -- ING Groep NV and B&N Bank PJSC say policy makers could still raise the possibility of walking back their commitment.

“If it falls below 5.5 percent, I think the central bank will ‘break’ its word,” Nataliya Shilova, chief analyst at B&N Bank PJSC in Moscow, said by e-mail. “After all, the central bank is targeting inflation, not rates, so it can opt for easing in 2016” if it concludes that a goal of 4 percent for 2017 will “definitely be reached and maintained.”

The path of inflation in the coming months can determine the central bank’s ability to resume easing after its “moderately tight” stance allowed for only two reductions this year. Policy makers are targeting price growth of 4 percent by end-2017 and see it reaching 5.5 percent to 6 percent in 2016 after overshooting their forecasts for a fourth consecutive year in 2015.

“Inflation needs to reach a level near 5 percent or lower to add intrigue to the issue of a rate decrease before year-end,” said Dmitry Polevoy, chief economist for Russia at ING. Still, “I don’t think the central bank will go for it because they are risking nothing. If everything turns out better than they expected, they’ll simply have an easier time cutting at the start of 2017.”

Revisiting policy pledges wouldn’t be without precedent in eastern Europe or the former Soviet Union. Five months after saying rates may remain on hold into 2019, the National Bank of Hungary in March restarted an easing cycle with a cut to a record. In Kazakhstan, less than a week after the governor said borrowing costs will fall once inflation drops within a target band, the central bank lowered its benchmark even though price growth remained more than double the upper end of the range.

Derivatives traders are already adjusting their bets for a Russian rate cut in the next three months. Forward-rate agreements now indicate 23 basis points of easing, up from last month’s low of eight basis points. Three of 24 economists polled by Bloomberg predict the 10 percent benchmark rate will be cut already this year. It will decline to 8 percent by the end of 2017, according to the median of forecasts.

The ruble, which has contributed to a letup in prices, has been trading near the strongest in a year, reaching levels that prompted President Vladimir Putin in July to warn his prime minister that its appreciation relative to oil needed to be watched. The Russian currency added 0.3 percent against the dollar at 10:44 a.m. on Wednesday in Moscow.

‘Remote Possibility’

After a cut in September that the central bank said was probably this year’s last, Nabiullina called another decrease “an extremely remote possibility” but allowed for some wiggle room.

“I do admit there is a slim chance this might happen -- but only if we see a substantial improvement against our baseline scenario,” she said.

While the central bank may restart easing in the first half of next year, positive real rates will remain in place for “quite a long period” in order to anchor inflation expectations at 4 percent, according to Nabiullina. Expectations for the next 12 months, a key determinant of monetary policy, rose to 14.2 percent in September after slowing to 12.6 percent the previous month, according to results of a survey published by the central bank.

Higher Costs

Increases in non-food prices and the cost of services are another area of concern. Their “resilience” in August “requires attention, implicitly justifying the cautious stance” of the central bank, according to ING’s Polevoy. Still, Goldman Sachs Group Inc. economists predict the annual consumer-price index will be at 5.3 percent in 2016 and reach 3.6 percent at end-2017. 

VTB Capital revised its 2016 inflation forecast to 5.8 percent from 6.1 percent after September’s data and said the exchange rate “remains key” to prices because a significant share of the consumer basket consists of items sensitive to currency moves. However, Russia’s seasonally adjusted monthly inflation is still probably higher than the central bank’s target range, it said in a report.

“The print adds to the string of positive disinflation surprises,” VTB Capital analysts led by Alexander Isakov said in the report. “From the monetary policy perspective, we view this print as an element in the case for restarting cuts in the first quarter of 2017.”

While “sizable” rate cuts loom in 2017 and 2018, the bigger-than-forecast drop in inflation last month won’t have “much impact” on policy this year, according to Capital Economics Ltd.

“It would take a much larger inflation surprise to bring rate cuts back onto the table before the year is out,” said Liza Ermolenko, a London-based analyst at Capital Economics.

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