Russia Returns to Easing, Signals Two More Rate Cuts This Year

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Russia’s central bank shifted solidly to monetary easing, saying its first interest rate cut in more than a year on Friday could be followed by two more in 2019, as inflation slows and growth sputters.

The move makes Russia the latest emerging market to shift toward more dovish policy as escalating trade woes weigh on growth. The change in trajectory of interest rates in developed economies reduces the risk of persistent outflows from emerging markets, the Bank of Russia said in a statement.

“One or even two more rate cuts are possible this year if the situation develops according to our base-case scenario and there are no negative surprises,” central bank Governor Elvira Nabiullina said.

The key rate was cut to 7.50% from 7.75%. That matched 33 forecasts in a Bloomberg survey, while two economists expected no change. Another rate reduction could come within the next three meetings, Nabiullina said.

Chile and India also lowered their benchmark rates recently and other central banks will likely follow if the Federal Reserve signals a shift to easing.

The ruble extended gains and 10-year government bond yields retreated 6 basis points to 7.64% as investors cheered the prospect of more rate cuts and slower inflation. Ruble bonds, known as OFZs, have already handed carry traders some of the best returns in emerging markets this year.

“The central bank definitely wanted to signal that it is joining the global monetary easing trend,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “We see more flows into OFZs given the current rate and inflation outlook.”

Read our live blog for more on the Russian rate decision

Annual inflation decelerated for a third month in June, reaching 5% as of June 10, the central bank said. Price growth will slow to 4.2%-4.7% by the end of the year, according to a statement published Friday, which cited weak consumer demand and ruble strength.

Inflation could rise if the Finance Ministry goes ahead with an idea to invest money accumulated in Russia’s wealth fund, the statement warned.

The central bank also cut its growth forecast for 2019 to 1.0%-1.5% from 1.2%-1.7%. A worsening of international trade tensions may lead to a slowdown in global growth, the statement warned.

``Given that the neutral policy rate is seen by the central bank in the range of 6%-7%, there will be scope for further cuts next year,'' said Ivan Tchakarov, a Moscow-based economist at Citigroup Inc.

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