Russia Surprises With Bigger Rate Cut, But Says It's Not a Trend

(Bloomberg) -- The Bank of Russia surprised the market with a cut in its key rate that was double what economists expected, but warned that it’s not shifting into higher gear on easing.

A deal between the Organization of Petroleum Exporting Countries and its allies to maintain oil production cuts until the end of 2018 was a key factor lifting the central bank’s outlook for next year, allowing it to pull off the cut in its benchmark rate to 7.75 percent from 8.25 percent, according to a statement on Friday. The drop fueled a bond rally.

But Governor Elvira Nabiullina tried to balance the aggressive move by emphasizing that the rate cut is consistent with its plans for a steady shift to a “neutral” stance. 

“We’ll move gradually, probably with pauses,” Nabiullina told reporters in Moscow. The central bank said only “some” easing is possible in the first half of 2018, which “seems to be more hawkish” than its previous guidance, according to VTB Capital.

The ruble briefly extended its declines after the rate announcement before paring losses and trading 0.3 percent weaker at 58.91 against the dollar as of 4:05 p.m. in Moscow.

The central bank is shifting after about two years of a “moderately tight” stance brought Russia’s real rates to among the highest globally. While it’s already bracing for a pickup in price growth, and the threat of U.S. sanctions lingers, rate setters surprised with faster easing after the decision by OPEC and its partners showed the strength of the unprecedented alliance between the world’s top two oil producers, Saudi Arabia and Russia.

Read analysis of the Bank of Russia rate decision in our TOPLive blog.

Russia’s prospects are improving as global inventories have fallen and crude prices rebounded. But the recovery remains spotty: industrial production fell 3.6 percent in November, according to data released Friday. Inflation is now at the lowest since communism ended more than a quarter of a century ago.

Given a better outlook for oil, the Bank of Russia said it’s raising its forecast for economic growth in 2018, expecting it now to be in line with the 1.7 percent to 2.2 percent it sees in 2017. The average price of oil is now seen at $55 a barrel next year, up from the central bank’s previous call for $44, according to Nabiullina.

Inflation dropped to a record low of 2.5 percent in November, but policy makers have attributed it to one-time factors such as a bumper harvest and a strong ruble. The central bank says inflation will return to its target of near 4 percent late next year.

Russia Surprises With Bigger Rate Cut, But Says It's Not a Trend

“The extension of the agreement to reduce oil production brings pro-inflationary risks down over a one-year horizon,” policy makers said in the statement. “Medium-term pro-inflationary risks still prevail over the risks of inflation’s sustainable deviation downward from the target.”

For the first time in months, the central bank issued no guidance before the decision. That caught many economists flat-footed, with all 33 analysts surveyed by Bloomberg predicting a rate decrease to 8 percent.

“The decision is a bit inconsistent with the previous rhetoric,” said Ivan Tchakarov, an economist at Citigroup Inc. in Moscow. “The pace of rate cuts will slow significantly in 2018; the question is how much.”

©2017 Bloomberg L.P.