Credibility Risk May Prompt a Sixth Straight Rate Cut in Russia

(Bloomberg) -- The Bank of Russia may be gearing up for its sixth consecutive interest-rate cut this week after inflation slid deeper below target in January.

A majority of economists polled by Bloomberg say Governor Elvira Nabiullina will cut the key rate to 6% when the central bank meets on Friday. Those arguing that borrowing costs are more likely to be kept on hold point to uncertainty surrounding a recent government overhaul and the global spread of coronavirus.

“Inflation could drop below 2% already in February and missing the target by 2 percentage points is not good for the central bank’s credibility,” said Tatiana Orlova, an economist at Emerginomics in London. “It would be hard for them to avoid criticism if they decided to hold with an undershoot of this magnitude.”

The central bank refrained from giving a clear signal ahead of Friday’s decision. At a press conference after the last rate meeting in December, Nabiullina hinted at the possibility of a pause in February to allow time to evaluate the impact of last year’s cuts. She will hold a news conference after Friday’s decision.

Inflation slowed for a 10th straight month to 2.4% in January, the Federal Statistics Service reported Thursday. The Economy Ministry expects price growth to fall as low as 2.2% this quarter.

Concern over coronavirus has pushed down oil prices, causing the ruble to weaken about 2.7% since mid-January. Elsewhere this week, central bankers have mainly been biding their time as the virus fallout reverberates through the world economy.

What Our Economists Say:

“Monetary policy already reflects the slide in inflation, and the central bank has earned some time to assess the data and survey the fiscal landscape. Another rate cut looks likely, just not this week.”

- Scott Johnson, Bloomberg Economics

Extra spending by the new government, expected to total about 2.1 trillion rubles ($34 billion) this year, may help boost inflation. There will be a “serious injection of liquidity” into the economy and the government will have to work closely with the central bank to prevent prices growing too fast, First Deputy Prime Minister Andrey Belousov said on Wednesday.

The Bank of Russia, which is currently in a self-imposed black out week, said that these discussions won’t affect its independence. They are sticking to their inflation target, according to its statement.

“We don’t see this as sufficient to justify inaction on rates at this stage,” analysts at Deutsche Bank including Peter Sidorov wrote in a research note published Friday. “Pausing at such a level when inflation is below target and not yet showing signs of improving could undermine the credibility of the central bank’s inflation target.”

--With assistance from Zoya Shilova.

To contact the reporter on this story: Anya Andrianova in Moscow at aandrianova@bloomberg.net

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Natasha Doff, Torrey Clark

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