Russia Ditches Rate Cuts as Recovery Adds to Inflation Pressures

The Bank of Russia ended its monetary easing cycle as signs of a rebound from the pandemic added to inflationary pressures. Interest rates were kept on hold for a fourth straight policy meeting.

“The potential for easing monetary policy has been exhausted,” Governor Elvira Nabiullina said at news briefing on Friday, adding that the central bank didn’t consider any option other than holding rates. “Policy will remain accommodative in 2021 to support the economy.”

The benchmark rate was held at a record low of 4.25% on Friday and Nabiullina said it’s too early to discuss a return to neutral policy, which would imply a rate of 5%-6%. A trajectory for future rates decisions will be published for the first time after the central bank’s April policy meeting, she said.

Russia Ditches Rate Cuts as Recovery Adds to Inflation Pressures

Russia made 200 basis points of rate cuts in the first seven months of last year to stimulate growth amid a pandemic lockdown and slump in oil prices. Since then the economy has rebounded and a weakening ruble has fed through to consumer prices, pushing up inflation. The currency has gained in recent weeks but growing sanctions risks have prevented it from keeping up with a rally in oil prices.

“The message from the central bank is slightly more hawkish than before, which is an attempt to provide the ruble with some support in case the EU in cooperation with the U.S. decides to impose sanctions on Russia,” said Piotr Matys, a strategist at Rabobank in Moscow.

Annual inflation is expected to peak at around 5.5% in the next few months and disinflationary risks no longer prevail over a one-year horizon, the central bank said. The 2021 inflation forecast was raised to 3.7%-4.2% from 3.5%-4%.

What Our Economists Say:

“The hawkish shift in guidance raises the risk of tightening in 2021, especially if inflation fails to slow in the coming months. But an extended hold seems more likely, with demand still relatively weak and fiscal stimulus set to be withdrawn.”

-- Scott Johnson, Bloomberg Economics.

The “constraining effect” of the pandemic on the economy was much less than expected, and that will add to inflationary pressures, the central bank said. Russia suffered a smaller contraction than expected last year and has already begun lifting many coronanvirus restrictions. The bank forecasts GDP growth at 3%-4% for this year and 2.5%-3.5% for next year.

The ruble pared some of its losses as Nabiullina was speaking but was still trading down 0.7% at 74.1325 per dollar as of 4:06 p.m. Yields on 10-year local notes were up for a fourth day, increasing 6 basis points on Friday to 6.5%.

“The central bank is preparing the market for the idea that we can see rate increases in 2021,” said Sofya Donets, an economist at Renaissance Capital in Moscow.

©2021 Bloomberg L.P.

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