U.S. Vote Fears Make Russia Hold Likely: Decision Day Guide

(Bloomberg) -- Bank of Russia Governor Elvira Nabiullina will probably let the forthcoming U.S. election dictate the outcome of this week’s interest rate decision.

Traders and a majority of economists are betting that she’ll opt for caution, keeping the key rate at 4.25% in the face of ruble volatility and the threat of new sanctions if Joe Biden wins the election. A handful of analysts in a Bloomberg survey are expecting a 25 basis point reduction.

“The central bank won’t change the key rate this close to the U.S. election,” said Alexey Tretyakov, a bond investor at Aricapital Asset Management in Moscow. “Any plans for more easing will be put off until next year.”

Nabiullina has said that more rate cuts may be needed, but any reductions now could exacerbate a recent slump in the ruble. The currency has plunged more than 8% in the past three months as concern mounts that a Democratic administration in the White House will crack down harder on Russia over election meddling and the recent poisoning of an opposition activist.

Nabiullina kept rates on hold at the last meeting in September following 200 basis points of cuts since the start of the year, but said more reductions could still be possible. A recovery from the economic slump in the second quarter is slowing as the coronavirus infection rate hits new records while the government cuts back stimulus.

Consumer-price growth edged closer to the central bank’s 4% target in September with an acceleration to 3.7%. The central bank has said inflation could rise as high as 4.2% by the end of the year.

Investors will be parsing Nabiullina’s news briefing after the rate decision for signs she still intends to cut rates further. The central bank will also release its quarterly update to its economic forecasts. The economy is expected to contract 4.3% this year and revert to growth next year, expanding 3.3%.

What Our Economists Say:

“The central bank faces rising uncertainty about the recovery, price pressure, politics and oil. Another cut is possible, especially with real rates still positive, but it would be more characteristic to wait for clarity before making another move.”

--Scott Johnson, Bloomberg Economics.

Forward-rate agreements, which have been predicting more monetary easing for most of this year, are now indicating that rates will stay at 4.25% for the rest of the quarter.

“In the post-U.S. election world, the central bank should find enough economic reasons to implement another cut,” Ivan Tchakarov, an economist at Citibank in Moscow, said in a research note. “The last policy meeting for the year in December may present the perfect opportunity to do so.”

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