Goldman Has ‘Little Conviction’ as Russian Rate Path Splits

  • All but 6 economists in survey see cut to 8.5% by central bank
  • Rosbank, Promsvyazbank, Goldman predict smaller move on Friday

Russia’s central bank has every reason to deliver its second rate cut of a half a percentage point this year, but Goldman Sachs Group Inc. is joining a small minority of economists and traders who believe it will go slow instead.

The choice this Friday may set the tone for monetary easing in the months ahead and beyond, with a smaller reduction of 25 basis points to 8.75 percent allowing the Bank of Russia to take a smoother road on the way to reaching its nominal equilibrium rate of 6.5-7 percent, according to Clemens Grafe, a Goldman economist in Moscow who said he has “very little conviction” in his firm’s call.

“The best way to do that is to steadily decrease that rate independent of short-term fluctuations,” Grafe said by email. “We are in a new phase of the cutting cycle and hence the central bank’s reaction function should change.”

The pieces are falling into place for Governor Elvira Nabiullina to resume easing after a pause in July, with rate cuts of 25 or 50 basis points both under discussion this week. While inflation has swung between 4.4 percent in June to 3.3 percent in August, the central bank considers those readings to be consistent with its target of 4 percent.

‘Past Behavior’

“If you go by past behavior, it will be 50 basis points,” Grafe said. “Inflation surprised to the upside in June -- so they didn’t do the 25 basis-point cut they wanted to do. Now inflation surprised to the downside in August, so by the same token they might do 50 basis points.”

All but six of the 41 economists surveyed by Bloomberg believe the central bank will take that course on Friday. Besides Goldman, the other dissenters include Promsvyazbank PJSC, Societe Generale SA’s Rosbank PJSC, PF Capital, Continuum Economics and Alpari Ltd. A poll by the Tradition brokerage showed that 48 of 54 traders also predict a cut to 8.5 percent.

While the Bank of Russia halted its easing cycle in July after three straight cuts, an inflationary shock from food prices has dissipated fast, with price growth slowing to a record in August and staying below the central bank’s target for two months. Given the speed of the deceleration, real rates actually rose by more than a percentage point so far this year, remaining among the world’s highest.

“The communication will be at least as important as the decision of doing 25 or 50,” Grafe said. “If they say they do 50 because inflation surprised to the downside, it might very well be that they pause once the base effects in food turn less supportive this month and the trade-weighted ruble depreciation comes through from October. So interest rate-volatility will remain unnecessarily high.”

Ruble, Oil

Geopolitical instability and the uncertain outlook for oil have so far failed to filter through to the currency market. The ruble is among the top five performers among developing nations since the last rate decision on July 28 with a gain of over 3 percent against the dollar. The Russian currency was 0.3 percent weaker at 11:03 a.m. in Moscow on Friday.

Even as weekly readings of inflation have shown zero or negative growth since mid-July, the central bank’s research and forecasting department has still warned of risks to the 4 percent target in the medium term.

“If they do a 25 basis-point cut, saying they look through the surprise in food inflation in August, they can just continue cutting by 25 basis points every meeting into the next year despite the short-term shocks to inflation from food and the exchange rate,” Grafe said.

— With assistance by Zoya Shilova

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