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Russia Gets Real on Rate Cuts as Inflation Sabotages Easing

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Russia’s central bank has barely made a dent in the real cost of borrowing despite chopping nominal interest rates by 250 basis points over the last year because inflation has plunged just as fast.

Another rate cut is on the cards again, especially with economic growth failing to gain traction. As inflation clings to the lowest level in Russia’s modern history, all but one of the economists polled by Bloomberg predict the fifth straight decrease on Friday.

“Monetary conditions tightened despite the nominal cutting cycle as the Bank of Russia has fallen further behind the curve,” said Goldman Sachs Group Inc. economist Clemens Grafe. “However, this should now be in the past and real rates should fall.”

Still Tight

Russian real rate remains high as inflation falls quicker than the key rate

Source: Federal Statistics Service, Bank of Russia

The central bank may even be teeing up a surprise reduction of 50 basis points to 7 percent when it meets this week, according to Credit Suisse Group AG and 4CAST-RGE. That’s double the quarter-point cut predicted by almost all of the 37 analysts in the survey. One expects no change.

The Bank of Russia signaled last month that its shift to “neutral” monetary policy -- a nominal rate of 6 percent to 7 percent -- could be completed in 2018, or a year earlier than planned. The question remains if price growth will pick up any time soon.

‘Moderately Tight’

After a couple years of a “moderately tight” stance, Russia’s real borrowing costs are now among the highest globally, a constraint on an economy sputtering after recession. By comparison, a cut on Wednesday by Brazil’s central bank means its benchmark is now a full 775 basis points lower than at the start of an easing cycle in October 2016, pushing its real rates below Russia’s.

Pressure to ease policy further is on the rise in Russia. President Vladimir Putin, in a landmark speech days before an election he won easily this month, urged the central bank “to gradually cut interest rates and make loans more affordable” while working with the government on jumpstarting economic growth. Gross domestic product rose an annual 1.5 percent in February, a deceleration after a downwardly revised gain of 1.9 percent in the previous month, according to the Economy Ministry.

“The central bank is looking for faster policy normalization,” said Alexey Pogorelov, an economist at Credit Suisse. “So we see them cutting by 50 basis points this Friday, especially when risks are skewed toward a slowdown in economic activity.”

The central bank will follow its meeting this week with Governor Elvira Nabiullina’s news briefing in Moscow and a quarterly update of its economic outlook. Its research and forecasting department sees inflation staying below the target of 4 percent in 2018 and remaining near that level next year.

Inflation Path

It’s an assessment shared by the Economy Ministry, which even warned that the annual consumer-price index may slip below 2 percent in June, from 2.2 percent in the first two months of the year. Meanwhile, household inflation expectations for a year ahead, a key concern for the central bank, declined in February after an uptick in the previous month.

While Goldman Sachs sees a cycle of consecutive cuts in quarter-point steps until the benchmark reaches 6.5 percent in the third quarter, followed by a pause and a resumption of easing later, a few outliers believe the central bank will be more decisive.

“The main reason” that a bigger cut is likely on Friday “is that CPI inflation has surprised on the downside,” said Juri Kren, an economist at 4CAST-RGE. “We expect it to remain below the central bank’s 4 percent target until the fourth quarter of 2019, reflecting the lack of demand-pull pressures.”

— With assistance by Zoya Shilova, and Olga Tanas

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