Ruble Buys Time for Central Banker Wanting to Make History

  • Buying foreign currency to weaken ruble by 1%-5%, survey shows
  • Central bank seen holding key rate unchaged at 10% on Friday

Not that Elvira Nabiullina was in any rush, but the Bank of Russia governor just found two good reasons to stand pat for longer.

With the economy shooting past the most upbeat of forecasts, and the central bank looking to bring inflation to the lowest year-end level in Russian history in 2017, monetary easing is just about off the table when policy makers review interest rates on Friday.

Add to that the surprise announcement last week that Russia will start purchases of foreign currency on the open market in February -- tempering the ruble’s gains in the process -- and the central bank may opt to extend its five-month rate pause even beyond March.

“Rate cuts could be shifted,” said Andreas Schwabe, an economist at Raiffeisen Bank International AG in Vienna. “A weaker ruble could make disinflation more difficult -- that is, reaching the central bank’s goal of 4 percent inflation would be less realistic. Thus, the introduction of the foreign-exchange scheme could require monetary tightening to preserve the Bank of Russia’s credibility as an ‘inflation targeter.’"

The new mechanism, designed to help insulate the exchange rate from volatility in oil, will end up weakening the ruble by 1 percent to 5 percent, according to a majority of 18 economists surveyed by Bloomberg. Its depreciation will reach 5 percent to 10 percent, more than a fifth of the respondents said, with the same share seeing the effect as negligible.

While the move could shield Russia from the impact of oil, stabilize its finances and sustain its competitive advantages, the central bank will have to account for the decision, according to Oleg Kouzmin, chief economist for Russia at Renaissance Capital in Moscow.

“This makes the Russian macro story more predictable in the mid-term, but for now it could be slightly negative for the ruble and interest rates,” he said.

Without the benefit of a stronger ruble cutting into inflation, borrowing costs may need to stay on hold for longer. Deprived of monetary stimulus since September, the economy has shown no loss of momentum, meaning one less worry for the central bank. Gross domestic product shrank only 0.2 percent in 2016, faring better than every forecast in a Bloomberg survey.

Nabiullina has already said the Bank of Russia is more likely to resume its easing only in the second quarter, and the pace of any reductions will ensure that monetary policy remains “moderately tight.”

While the ruble hasn’t posted a weekly gain since early January, it’s still up more than 3 percent since the central bank last met in December. The one-week auction rate will remain at 10 percent this week for a third consecutive meeting, according to 32 of 36 economists surveyed by Bloomberg. Two analysts predict a cut to 9.75 percent, with the same number seeing a reduction of half a percentage point.

“A lack of pressures from an appreciating ruble does allow the central bank to postpone the first rate cut at least to March, or potentially even to the second quarter,” Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow, said in a report.

The central bank will announce its rate decision Friday at 1:30 p.m. in Moscow. The benchmark will end this quarter at 9.5 percent, according to another poll.

Forward-rate agreements are signaling 26 basis points of decreases in borrowing costs during the next three months, down from last week’s high of 60. The ruble traded 0.8 percent stronger at 59.6275 against the dollar as of 1:05 p.m. on Thursday.

“The central bank doesn’t need the ruble to appreciate to bring down inflation,” said Per Hammarlund, chief emerging-market strategist at SEB SA in Stockholm. “It needs high interest rates and time.”

— With assistance by Zoya Shilova, and Anna Andrianova

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