Russia Pivots Toward Rate Cuts, Warns Room for Easing ‘Limited’

  • Benchmark kept at 10%, matching all but one forecast in survey
  • Policy makers targeting inflation at 4% in 2017 after crisis

Russia’s Central Bank Holds Key Rate at 10%

Russia’s central bank moved past this year’s unprecedented pledge to keep interest rates on hold while warning of “limited” potential for monetary loosening.

The Bank of Russia held the one-week auction rate at 10 percent for a second meeting and said easing may resume in the first half, according to a statement on Friday. That’s in line with all but one of 35 forecasts in a Bloomberg survey.  Governor Elvira Nabiullina said at a news conference that the pace of any reductions will ensure that monetary policy remains “moderately tight,” with the first decrease more likely in the second quarter than in the first three months of 2017.

“The potential of interest-rate reduction is limited in the near future,” the central bank said. “Moderately tight monetary conditions are still conducive to reducing inflation.”

Policy makers are turning the page on their September promise as they grow more certain of hitting their 4 percent inflation target in 2017, the lowest year-end level in modern Russian history. While affirming a stance that allowed for only two cuts in 2016, the central bank chose not to extend its commitment to holding rates beyond this year and through the first quarter, an option aired by First Deputy Governor Ksenia Yudaeva two months ago.

‘Rather Overcautious’

“The Bank of Russia prefers to stay rather overcautious than hurry up,” Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki, said by e-mail. “High real rates go even higher as disinflation continues. Overall, sober and consistent comments by the central bank, which make the market sure and happy about the bank’s inflation target .”

A surprise agreement late last month by the Organization of Petroleum Exporting Countries to cut oil output has upended assumptions for Russia, making it a darling of investors by improving the outlook for crude, the nation’s chief export earner. While Nabiullina has warned the outlook for crude prices remains a “serious risk” for the economy, she said on Friday that oil may average higher than $40 a barrel in 2017, a level used in the central bank’s baseline projection.

The ruble’s surge to the world’s best performance this year is making the central bank’s job easier by driving down the cost of imports. The Russian currency traded 0.3 percent stronger at 61.5825 against the dollar as of 3:27 p.m. in Moscow. It’s gained more than 19 percent this year.

Inflation Outlook

Inflation has decelerated faster than estimated by economists in each of the past three months, putting policy makers on track to meet their price forecast this year for the first time since 2011. Annual inflation was at 5.6 percent on Dec. 12, according to the central bank, which now projects it at 5.4 percent to 5.8 percent by year-end.

While the economy is failing to gain momentum after two years of recession, the country’s longest this century, the central bank predicts gross domestic product is set to return to growth, gaining less than 1 percent in 2017 and as much as 2 percent in 2018-2019.

“The Bank of Russia affirmed its cautious approach to monetary policy,” said Piotr Matys, an emerging-market currency strategist at Rabobank in London. “Still, the central bank may opt to cut rates earlier next year if the ruble continues to appreciate.”

— With assistance by Andre Tartar, and Zoya Shilova

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