Russia May Extend Rate-Hold Pledge as Yudaeva Wary on Inflation

  • Central bank may hold rate through first quarter, Yudaeva says
  • First deputy governor cites risks to reaching 4% inflation aim

Russia’s central bank may extend its unprecedented commitment to leave interest rates unchanged beyond this year and through the first quarter if inflation is too slow to decelerate, according to First Deputy Governor Ksenia Yudaeva.

Calling the central bank’s current approach “data-driven,” Yudaeva said the key rate needs to remain at 10 percent to reach the inflation target of 4 percent by the end of 2017. That’s despite the chance that price growth may slow to the low end of the central bank’s forecast of 5.5 percent to 6 percent this year, she said in an interview in Washington on Thursday.

“We see different processes in inflation, and while there’s a trend for its slowdown, there are risks that it won’t be enough to reach the inflation target,” Yudaeva said. 

Policy makers are leaving little to chance as their chase of the inflation target enters the final stretch after overshooting their price forecasts for a fourth consecutive year in 2015. The central bank’s first comments since inflation surprised by decelerating to a 31-month low of 6.4 percent in September signal it will continue to show no complacency after handing down more explicit forward guidance on steady rates through the rest of 2016 following two reductions this year.

How Fast?

“On an annual basis, inflation will continue to decelerate due to a base effect,” Yudaeva said. “But we can extend our promise also to the first quarter if current inflation won’t ease fast enough” or some of its components such as non-food prices “decelerate too slowly.”

Forward-rate agreements signal 18 basis points of easing in the next three months, up from September’s low of eight basis points. The benchmark rate may decline to 9.5 percent in the first quarter, according to the median of 20 estimates in a Bloomberg survey.

While the economy is struggling to shake off its longest recession in two decades, the Bank of Russia is doubling down on what it’s called a “moderately tight” stance, which has kept its benchmark above inflation since January. Positive real rates should remain above 2.5 percent to 3 percent to anchor inflation expectations at 4 percent, according to Yudaeva. 

‘Moderately Tight’

“This transition period may take some time, and a moderately tight approach to monetary policy will last for all this time,” Yudaeva said. “But if we see that inflation is significantly lower than 4 percent -- especially if it’s be clear that it’s stable and not a result of a one-time decline -- then that will be a reason to ease monetary policy to return inflation back to 4 percent.”

Inflation expectation for the next 12 months, a key determinant of monetary policy, rose to 14.9 percent, after slowing to 12.6 percent the previous month, according to results of a survey published by the central bank.

“If we’ll see disinflation processes that strongly increase the probability of reaching 4 percent, then we can make a decision to reduce rates in the first quarter,” Yudaeva said.

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