Bank of Russia Hints at Big Rate Cut to Prop Up Crashing Economy

(Bloomberg) --

Bank of Russia Governor Elvira Nabiullina hinted at a bigger-than-normal interest-rate cut when the central bank meets next week, stressing that monetary easing is now the “main option.”

“We are looking at different economic scenarios and weighing how much room we have to ease monetary policy and what size of steps we should take,” Nabiullina said in her final comments before the central bank’s black-out week. The central bank usually favors moves of 25 basis points at a time, but occasionally opts for half a percentage point.

The dovish tone is good news for bond investors who have been creeping back into Russian government debt following a $2 billion exodus last month. The Finance Ministry needs stronger demand so it can ramp up borrowing to fund stimulus measures aimed at softening the economic blow from low oil prices and the coronavirus.

Russia’s 10-year bond yields fell during Nabiullina’s comments to trade down 21 basis points at 6.46%. Traders are now expecting three quarters of a percentage point of easing in the next three months, according to forward-rate agreements.

“This a strong dovish shift in communication,” said Dmitry Dolgin, chief economist at ING Bank in Moscow. “A 100-200 basis-point is still not very likely given the inflationary expectations, but 50 basis points isn’t out of the question.”

The slump in global oil prices has made Russian policy makers cautious about pushing out a big stimulus program to cushion the blow from coronavirus. The central bank kept rates on hold at a meeting last month to avoid exacerbating a plunge in the ruble. The currency has since stabilized, while a drop in consumer demand is likely to put a cap on a potential jump in price growth.

Annual inflation has accelerated to around 2.9%, Nabiullina said Friday, adding that a jump in price growth expectations will be temporary. Economic activity picked up slightly in the past week, she said.

©2020 Bloomberg L.P.