Russia’s ‘Hawkish Cut’ Lays Ground to Shift Rates to Neutral

Updated on
  • Benchmark rate is lowered to 8.25%, matching most forecasts
  • Decision follows inflation staying below 4% for over 3 months

Russia’s central bank signaled for the first time that it’s preparing to abandon its “moderately tight” stance, but stressed the shift won’t be rushed as risks to inflation linger over the medium term.

A transition to neutral monetary policy is set to be “gradual,” according to a statement on Friday. Policy makers reduced borrowing costs for a fifth time this year, lowering the one-week auction rate to 8.25 percent from 8.5 percent, in line with most forecasts. Economists at Goldman Sachs Group Inc. and Morgan Stanley predict a decrease by the same amount at this year’s last meeting on Dec. 15, followed by a pause in the first quarter.

It’s “another hawkish cut,” said Alina Slyusarchuk, an economist at Morgan Stanley. The “transition to neutral monetary policy will be more gradual than the market expects.”

While continuing to stress that temporary factors drove inflation below the target of near 4 percent, the Bank of Russia is now preparing to undo the policy mix that’s kept real rates among the highest globally and pushed price growth to the slowest in the country’s modern history. Governor Elvira Nabiullina has said the key rate is likely to reach its nominal equilibrium level of 6.5 percent to 7 percent only in 2019 after following a “smooth and gradual” path. 

“The careful approach to monetary-policy making that the Russian central bank has been systematically pursuing in the last couple of years will persist,” said Ivan Tchakarov, an economist at Citigroup Inc. in Moscow. “They will continue to cut, but modestly so, until they move from the currently tight policy to a neutral position in 2019.”

Policy makers on Friday shortened the range of their guidance, only saying the board “leaves open the option of a further reduction in rates at its upcoming meetings.” In September, they said further easing was possible “during the next two quarters.”

Medium Term

“Medium-term risks of inflation overshooting the target dominate over the risks of its persistent downward deviation,” the central bank said in the statement.

Inflation was estimated at an annual 2.7 percent on Oct. 23, and the central bank projects it close to 3 percent by the end of the year. Meanwhile, inflation expectations, a key concern for policy makers, actually rose in September to remain at more than triple the headline number of 3 percent.

“We expect the pace of cuts to remain very gradual as the task of anchoring inflation is far more difficult than bringing it down,” said Tatiana Evdokimova, chief economist for Russia at Nordea. “The central bank has no need to hurry.”

The ruble extended its decline following the rate decision and traded 0.7 percent weaker at 58.27 against the dollar as of 7:14 p.m. in Moscow.

“Given that one of the main factors that contributed to the slowdown in inflation so far this year is the stronger ruble, the central bank may opt to pause its monetary policy easing cycle should the dollar-ruble rise sharply in the coming months,” said Piotr Matys, an emerging-market currency strategist at Rabobank in London. Still, the latest “cut is likely to be followed by further gradual monetary policy easing,” he said.

— With assistance by Zoya Shilova

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