Bank of Russia Cuts Rate for Third Time, Signals More Easing

(Bloomberg) --

The Bank of Russia made its third consecutive interest-rate cut and said more monetary easing is possible at an upcoming meeting as inflation dropped closer to a 4% target.

The benchmark rate was cut to 7% from 7.25%, according to a statement published on Friday. The move to the lowest level since March 2014 was forecast by 33 economists out of 35 in a Bloomberg survey. The ruble extended an earlier advance after the announcement.

“It’s probable that we will lower the rate at one of the upcoming meetings, meaning one of the next three,” Governor Elvira Nabiullina said at a press conference in Moscow. She was vague, however, when asked whether there could be more than one cut in the two meetings left before the end of the year.

She warned that the slowdown in global growth has turned out to be greater than expected and that has hurt Russian exports.

The central bank renewed its easing cycle in June after a pair of rate hikes last year to stem risks to inflation from a tax rise. Some economists had suggested recent ruble weakness due to global trade volatility and proposals for an increase in spending may limit easing going forward.

“The comments were more dovish than we expected, but not overly so,” said Yury Tulinov, head of research at Rosbank in Moscow. “If there are no shocks to the currency from U.S.-China, sanctions and Brexit before the end of the year, they are ready to cut again.”

The key rate is now at the top of the central bank’s estimated neutral range of 6%-7%, which is why guidance on the level was removed from the statement, Nabiullina said.

Inflation is decelerating faster than expected this year, aided by an early harvest and weak consumer demand. The central bank cut its year-end inflation outlook to 4%-4.5% from a June forecast of 4.2%-4.7%.

What Our Economists Say:

“The guidance leaves the door open to at least another reduction this year -- in our view, in December. A pause in between would reflect policy makers running out of road, with the easing cycle likely to end in early 2020.”

- Scott Johnson, economist, Bloomberg Economics

Economy Minister Maxim Oreshkin has called for more easing to stimulate growth, which slipped to 0.7% in the first half. He has warned inflation could drop as low as 3% at the beginning of 2020. The central bank on Friday cut its growth forecasts for 2019-2021.

The government plans to accelerate spending on infrastructure projects by the end of this year, which could spur inflation. An additional proposal to spend the liquid part of the country’s national wealth fund has drawn warnings from central bank.

The ruble strengthened with other emerging-market currencies, adding 0.8% to 65.7 versus the dollar, the strongest level on a closing basis since Aug. 22. The yield on 10-year ruble government bonds, known as OFZs, dropped 3 basis points to 7%.

“While it goes against economic theory, the ruble loves the cut,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “Non-residents can intensify their inflows into OFZs and economic prospects for Russia improve on continuing monetary easing.”

--With assistance from Zoya Shilova, Artyom Danielyan, Kira Zavyalova and Evgenia Pismennaya.

To contact the reporters on this story: Anya Andrianova in Moscow at aandrianova@bloomberg.net;Andrey Biryukov in Moscow at abiryukov5@bloomberg.net

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

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