Photographer: Andrey Rudakov/Bloomberg

A Not-So-Quiet Week Means Russia's Rate Path Could Go Three Ways

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Russia’s central bank didn’t have the quietest of weeks during its period of radio silence before Friday’s decision on interest rates.

Since Governor Elvira Nabiullina said on Feb. 1 that the Bank of Russia was contemplating “slightly faster” monetary easing than it had anticipated, a rout ripped through global markets and crude went on its biggest drop in two months. The ruble depreciated against the dollar during four of the past five days to trade at its weakest this year.

On the other side of the ledger, inflation slowed more than forecast in January to a record low, and the threat of U.S. sanctions against Russian sovereign debt has receded. The consensus in a Bloomberg survey of 39 economists is that a cut of a quarter-percentage point is in the offing, with only six analysts predicting a bigger decrease or no change in the 7.75 percent benchmark. All three options will be on the table, according to Igor Dmitriev, the head of the central bank’s monetary-policy department.

“The market meltdown will certainly be something the Russian central bank will keep an eye on, but so far it seems unlikely that it will sway its decision,” said Liza Ermolenko, an economist at Barclays Capital in London. “In general, emerging markets, particularly currencies, have actually held up relatively well. And the weakness in the ruble has been manageable.”

Among Russia’s peers in developing nations that reviewed borrowing costs this week, India, Poland and the Philippines all kept their benchmark rates on hold, while Brazil pulled off a cut but signaled the end of its most aggressive easing cycle in the last decade.

What Our Economists Say...

Inflation was surprisingly low last month, but weakness in oil and the ruble this month is a reminder that there’s plenty of risk to the outlook. A small cut will leave room to maneuver.

--Scott Johnson, Bloomberg Economics

Nabiullina may be keen to wait for the dust to settle on the global stock turmoil before she takes further bold steps to ease monetary policy after a surprise rate cut of half a percentage point in December. Weak demand for a U.S. Treasury auction on Wednesday raised the prospect that a debt selloff that helped trigger a burst of volatility in equities could resume.

The drop in markets could prompt “caution” from the central bank, since a cut of 50 basis points could contribute to a local selloff, according to analysts at UralSib.

As global stock indexes went on a wild ride over the past week, not all was quiet on the home front. Russian inflation expectations for a year ahead, a key concern for the central bank, rose to 8.9 percent in January, more than double its target for price growth, according to poll results released last Friday. Inflation as perceived by Russians was even higher.

“The uptick in inflation expectations and the recent global market turmoil, which weighed on oil prices and the ruble, call for a more cautious cut,” said Inan Demir, an economist at Nomura International Plc in London. “Although it is a very close call, we are more inclined toward a 25 basis-point cut.”

— With assistance by Natasha Doff, and Zoya Shilova

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