Russia Keeps Rate on Hold, Weighs Inflation Impact of Past Hikes

(Bloomberg) -- Russia’s central bank kept the key rate unchanged following a hike in December as a rally in the ruble and weak consumer demand tempered a spike in inflation.

The one-week auction rate was kept at 7.75 percent, according to a statement on Friday. That matched 39 forecasts out of 40 in a Bloomberg survey. One economist had predicted a quarter-point increase.

The bank “will decide on the key rate, taking account of whether the rate increases in September and December 2018 are enough for annual inflation to return to the target in 2020,” the statement said. “The balance of risks remains skewed toward pro-inflationary risks, especially over a short-term horizon.”

Russia Keeps Rate on Hold, Weighs Inflation Impact of Past Hikes

The decision shows a preemptive hike in December and September might have had some effect in stabilizing the ruble and cooling price growth amid a value-added tax hike. Headline inflation accelerated to 5 percent in January, in line with central bank forecasts, and core inflation surprised to the downside as weak consumer demand put a cap on price increases.

Inflation Peak

The central bank maintained its estimate that annual inflation will peak in the first half of this year and ease to as low as 5 percent by the end of this year, reaching 4 percent in 2020. Policy makers will need at least until April to evaluate the impact of the VAT increase that took effect Jan. 1, according to the statement.

The bank’s guidance “considerably reduces the chances of a rate increase,” said Oleg Kouzmin, an economist at Renaissance Capital in Moscow. “We’ll see a rate cut no earlier than the start of 2020, and we won’t see a rate increase this year unless there are sanctions.”

The December hike, as well as a rally in emerging markets, also helped offset the negative impact of a resumption of foreign-currency purchases in January The ruble, which is among the best-performing currencies in the world this year, traded 0.1 percent weaker at 66.006 against the dollar at 2:31 p.m. in Moscow on Friday.

The big question now is whether economists should expect more rate hikes later in the year after the central bank abruptly switched course last year. Governor Elvira Nabiullina had said that the central bank is not in a tightening cycle, but hasn’t ruled out more interest rate increases in the next few months. Economists expect the key rate to reach 8 percent in the second quarter of this year, according to another Bloomberg survey.

What Our Economists Say..
“The Bank of Russia has left the door open to a March hike by citing the uncertainty around VAT effects and the upward drift in inflation expectations.”

--Scott Johnson, economist, Bloomberg Economics.

Another key risk to the central bank’s outlook is the threat of U.S. sanctions over alleged Russian election meddling. Discussion about the proposed restrictions has quietened in Washington in recent months, boosting confidence in the ruble.

The central bank made “a no-drama decision” for once, after the U.S. Federal Reserve eased off on rate hikes, said Vladimir Miklashevsky, an economist at Danske Bank A/S in Helsinki. “The statement sounds moderately hawkish, and a reverse in risk-off sentiment could still trigger a hike in March 2019.”

©2019 Bloomberg L.P.