Photographer: Andrey Rudakov/Bloomberg

A Guide to Why Bank of Russia Can Still Break Its Rate Vow

  • Possible triggers include oil, ruble surprises, survey shows
  • Central bank vowed to hold rates in 2016 to meet inflation aim

Bank of Russia Governor Elvira Nabiullina may have already turned the calendar to 2017 by giving up on more monetary easing this year. That doesn’t mean the lone remaining meeting on interest rates next month is devoid of all intrigue.

While the central bank’s thinking will hinge on inflation, surprises from oil to wages could set the stage for a cut in borrowing costs, a Bloomberg survey of 23 economists showed. After announcing the unprecedented rate commitment in September, Nabiullina already conceded that another decrease -- albeit “extremely unlikely” -- can’t be completely ruled out. The next review of interest rates is scheduled for Dec. 16.

“If you don’t want to miss a surprise rate cut, follow the oil price,” said Nerijus Maciulis, chief economist at Swedbank AB in Vilnius, Lithuania. “To cut or not to cut rates -- it all boils down to the price of oil and the ruble exchange rate. Russia can and should cut its interest rates.”

After often wrong-footing the markets with rate cuts in 2015, including one of the most abrupt reversals by any central bank since 1990, Russian policy makers have shown little sign of weakening resolve this year. The key rate was held at 10 percent last week, with the Bank of Russia warning that a slowdown in price growth was largely the result of temporary factors such as a stronger ruble, while a decline in inflation expectations remained “unsteady.”

Economists surveyed by Bloomberg pointed to the following factors as possible triggers for a rate cut in 2016:

  • Price growth averaging 5.5 percent this year, compared with the current 7.5 percent
  • Inflation expectations for a year ahead falling to 5 percent from 12.3 percent
  • Oil jumping to $60 a barrel, from near $50 now
  • The ruble appreciating to 57 against the dollar, compared with about 63.2 on Tuesday
  • Nominal wages expanding 3.5 percent from a year earlier, after a 9.4 percent increase in September

“There’s a realistic chance that the central bank is going to cut earlier than pledged,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “But ultimately, inflation and the expectations over it will determine the bank’s course.”

The Bank of Russia issued its pledge to hold rates through the rest of the year after only two reductions in 2016. Policy makers are relying on what they’ve called their “moderately tight” stance to bring inflation to 4 percent by end-2017 from 6.4 percent in September. While a statement after their Oct. 28 decision reiterated that rate cuts are possible in the first half of next year, First Deputy Governor Ksenia Yudaeva has said the commitment may in fact be extended through the first quarter.

‘Much Faster’

Higher oil prices may allow for “much faster” monetary easing, Nabiullina said in an interview last month. Previously she’s said that only “significant deviations” from the central bank’s baseline forecasts could trigger a cut this year. Policy makers see inflation reaching 5.5 percent to 6 percent in 2016 after overshooting their forecasts for a fourth consecutive year in 2015.

Oil is trading near the lowest close in more than a month after weekend talks between OPEC and other major producers failed to yield concrete details on an accord to reduce the global crude surplus. The ruble is the world’s second-best performer this year with a gain of more than 16 percent against the dollar. It strengthened 0.4 percent on Tuesday.

“The Bank of Russia’s determination to meet its inflation target is now much more credible and should be considered as a key for future policy developments,” said Sergey Narkevich, an analyst at Moscow-based Promsvyazbank PJSC. “A significant decline in headline inflation and consumer inflation expectations are the only crucial preconditions for a more expansionary -- or less tight than the current conditions -- monetary policy.”

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