Russia Surprises With Small Rate Cut, Signals More Easing

(Bloomberg) -- The Bank of Russia surprised economists by delivering its smallest interest-rate cut in months, but left the door open for further reductions.

The benchmark interest rate was cut by 25 basis points to 4.25%, the central bank said in a statement on Friday. Thirteen analysts in a Bloomberg survey of 39 forecast the move, while the majority had expected a bigger reduction. The ruble and government bonds declined.

“If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings,” according to the statement. An inflation forecast for this year was lowered to 3.7%-4.2%.

Governor Elvira Nabiullina will hold a news conference at 3 p.m. Moscow time.

The central bank has now slashed interest rates by 325 basis points in the past year, in line with other major emerging markets which have been taking bold measures to soften the blow from a global slump. Persistently low inflation means that Russia’s real rate has remained positive, keeping government bonds attractive to investors.

What Our Economists Say:

“The central bank is nearing its limits and may prefer to go slow in the face of uncertainty. Another small cut in September is likely, but that would probably spell the end of the cycle.”
--Scott Johnson, Bloomberg Economics

Nabiullina probably opted for a smaller cut after a full percentage point reduction last month because annual inflation has edged higher, according to Ivan Tchakarov, an economist at Citibank in Moscow. Price growth accelerated to 3.3% as of July 20, the central bank said Friday. It is still well below the 4% target,

“I see another 25 basis-point cut by the end of the year to finish the current cycle,” Tchakarov said. “It could even happen in September.”

The ruble extended declines slightly after the rate decision and was trading 0.5% weaker at 71.8325 per dollar as of 2:16 p.m. in Moscow. Ten-year government bonds declined, lifting the yield 3 basis points to 5.82% -- the highest level in a week.

The economy is heading for its deepest slump in more than a decade this year, with the International Monetary Fund forecasting a 6.6% contraction. Incomes slumped 8% in the second quarter, the biggest drop since a financial crisis in 1998.

The central bank narrowed its estimate range for the economic downturn in 2020 to 4.5%-5.5%. Average oil price estimates were increased to $38 a barrel this year from an April forecast of $27.

Nabiullina returned to her more usual cautious quarter-point steps, after breaking from tradition at the last two meetings to soften the blow from the economic slump. Some analysts had forecast that a bigger reduction today would bring the current easing cycle to a close.

“I’m a bit disappointed,” said Piotr Matys, a strategist at Rabobank in London. “Why wait until next time to cut again? A proper 50 basis-point cut would make far more sense.”

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