Russia Easing Hopes Surge as Central Bank Poised for Cut

(Bloomberg) -- Newly confident that Russia’s central bank will cut interest rates Friday, the market is already wondering when the next reduction will come.

Most economists are forecasting a second rate cut in September, while analysts at Barclays and Bank of America see 75 basis points of easing by the end of the year. The dovishness is reflected in government bond yields, which have tumbled this year to levels last seen in July. Forward rate agreements show almost half a percentage point of easing in the next three months.

Even as Governor Elvira Nabiullina dropped a strong hint that the first cut since March 2018 will be on the bank’s agenda Friday, she warned that there’s no rush to undo the two surprise rate hikes imposed late last year amid an uptick in inflation.

But most economists see few reasons to hold back as data shows inflation retreating and growth slowing. A move by the Federal Reserve toward rate cuts would only strengthen the case further.

“Unless something drastic happens, all the indications are that they really should be cutting, given where inflation stands and where growth is,” said Liza Ermolenko, an economist at Barclays in London. “Recent changes in the outlook for global monetary policy creates an environment where the central bank can be more forceful with easing than we originally thought.”

Nabiullina will likely give a hint at the central bank’s plans for the rest of the year at a press conference scheduled for 3pm on Friday, shortly after the rate decision is announced. Thirty three economists in a Bloomberg survey forecast a 25 basis point cut to 7.5% on June 14, while two expect no change.

One of the two, Vladimir Tikhomirov from BCS Financial Group in Moscow, still expects 50 basis points of cuts by the end of the year, he just thinks the central bank will wait at least until the next meeting in July to start easing.

What Our Economists Say:

“The central bank is likely to loosen the reins gradually, with a quarter-point cut this week and another in the third quarter. The uncertainty around oil prices, sanctions and inflation expectations could limit easing to 50 basis points in 2019, with more to come next year.”

--Scott Johnson, economist, Bloomberg Economics.

Annual inflation eased to 5.1% in May, down from a peak of 5.3% in March, but still a long way from the central bank’s 4% target. Economists forecast price growth to retreat to 4.6% by the end of the year, according to another Bloomberg survey.

--With assistance from Zoya Shilova and Alex Nicholson.

To contact the reporter on this story: Anna Andrianova in Moscow at aandrianova@bloomberg.net

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

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