Russian Inflation Puts Rate Cut in Play, Central Banker Says

  • Dmitriev sees grounds to consider easing at March 24 meeting
  • Central bank has said potential for cuts this half diminished

Russia’s first interest-rate cut since September will be an option when the central bank meets next week, a top official said, in the strongest signal yet that the monetary authority may tailor policy to a faster-than-forecast slowdown in inflation.

After warning last month that the potential for easing in the first half has “diminished,” the improving outlook for prices is putting rate cuts back in play. Seasonally adjusted monthly inflation fell to 0.1 percent in February from 0.3 percent in January, according to Igor Dmitriev, head of the central bank’s monetary policy department.

Igor Dmitriev

Source: Russian Central Bank

“These figures are clearly low, and for me that’s a reason to suggest to the board of directors that it consider in March the possibility of a rate reduction among other options,” Dmitriev said in an interview in Moscow.

The next meeting marks a crossroads for policy makers led by Governor Elvira Nabiullina only weeks after they cast doubt on monetary easing any time soon after only two rate cuts last year. The dilemma is whether to look past a pickup in inflation expectations in February even as price growth plumbs new lows.

Dmitriev leads a department that makes recommendations for policy makers to consider, although he doesn’t cast a vote for the decision. His comments are the first time a central banker has publicly said that the faster-than-anticipated drop in inflation could be reason to cut this month.

The ruble reversed gains against the dollar, before trading 0.2 percent stronger in Moscow. It is the second-best performer among its emerging market peers in the past year.

Historical Lows

In February, inflation eased to 4.6 percent from a year earlier, edging closer to the central bank’s target of 4 percent. In the history of modern Russia, the annual index was below 5 percent for only six months in 2012, when authorities pushed back increases in utility rates. Bank of America Corp. estimates that headline inflation in the first two months already moved below zero in seasonally adjusted terms.

“A rate increase is now out of the question, while a cut of 25 basis points to 50 basis points is possible, as well as holding it unchanged,” Dmitriev said. “On the one hand, there is a strong decline in inflation. But risks persist, including from the oil market, the harvest’s performance, the global food market. Inflation expectations remain high.”

Lacking Confidence

Inflation expectations, a key concern for the central bank, may give it pause after rising in February. Their median value was at almost triple the target, meaning households are still lacking the confidence to believe the price slowdown is more than a temporary letup.

The one-week auction rate will remain at 10 percent next week for a fourth consecutive meeting, according to 15 of 21 economists surveyed by Bloomberg. Four predict a cut to 9.75 percent, with two seeing a reduction of half a percentage point.

“High inflation expectations are a signal to consider not changing the rate as we don’t know how strong of any impact they will have on inflation,” Dmitriev said. “On the other hand, such a significant trend in the inflation slowdown is already grounds for adjusting policy.”

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