Inflation at Record Tempts Bank of Russia as Target in Reach

  • Rates may be cut before next quarter, RenCap, ING, Goldman say
  • Central bank keeps policy ‘moderately tight’ to meet its goal

The Russian central bank’s doubters won’t let up.

Less than a month after Governor Elvira Nabiullina said the Bank of Russia is more likely to resume its monetary easing only in the second quarter, economists from Renaissance Capital to Goldman Sachs Group Inc. and ING Groep NV say it can pull off an interest-rate cut even earlier. Policy makers are next due to review borrowing costs on Feb. 3 and March 24. 

Ksenia Yudaeva on Jan. 12.

Photographer: Andrey Rudakov/Bloomberg

In the first public remarks by a central banker since last month’s meeting, First Deputy Governor Ksenia Yudaeva said a looser stance is possible this year. That depends on inflation falling below 4 percent due to factors not considered “one-off” in character, she said on Thursday.

“If it’s a result of some sustainable factor, then there will be grounds for a bit more relatively easy policy,” Yudaeva told reporters in Moscow. “Policy will be directed at bringing inflation to 4 percent also in 2018, in 2019 and so on.”

After already notching the lowest year-end inflation in modern Russian history in 2016, when the central bank met its price forecast for the first time since 2011, a target of 4 percent is fast moving within reach. While its unprecedented pledge to refrain from easing last quarter was also called into question, policy makers held to their promise and affirmed their “moderately tight” stance when they last met on Dec. 16.

“February looks probably too early for the move given the hawkish tone of the central bank’s comments in December, but the meeting in March may clearly be the one when it resumes policy easing,” said Dmitry Polevoy, chief economist for Russia at ING in Moscow. “Ruble strength, if continued, might be serving as an additional argument.”

Annual inflation has since slowed more than estimated by economists, easing to 5.4 percent in December and matching the lower end of the central bank’s forecast. Both core and headline consumer-price indexes are running below the 4 percent annualized rate targeted by the central bank, according to Goldman Sachs.

“No further disinflation is needed to achieve the inflation target,” Clemens Grafe, a Moscow-based economist at Goldman Sachs, said in a report.

Forward-rate agreements are signaling 35 basis points of decreases in borrowing costs during the next three months, compared with December’s high of 44. The ruble traded 0.8 percent stronger at 59.27 against the dollar as of 3:16 p.m. in Moscow. The Russian currency is the world’s third-best performer this year with a gain of more than 3 percent.

‘Moderately Tight’

The pace of any reductions will ensure that monetary policy remains “moderately tight,” according to Nabiullina. The key rate was kept at 10 percent for a second meeting in December after two reductions shaved off a cumulative 100 basis points last year. The benchmark will be at 9.5 percent by the end of the first quarter, according to the median forecast of 22 economists surveyed by Bloomberg.

While inflation expectations for a year ahead fell to 12.4 percent last month, they continue to give pause to the central bank. The pace of their decline is “insignificant and not aligned with the inflation slowdown,” Nabiullina has said. Their level still isn’t low enough for the central bank to say that expectations are anchored and present no risk for consumer-price growth, according to the governor.

The central bank will study all factors behind slower price growth before making new longer-term forecasts, which will serve as the basis for rate decisions, Yudaeva said.

“Our main task is to return inflation to 4 percent if it deviates under the influence of any shocks,” she said. “Should it drift lower as a result of some longer acting factors, we’ll try to bring it back to 4 percent.”

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