Russia’s Nabiullina Doesn’t Rule Out Rate Cuts Below 4%

(Bloomberg) -- The Bank of Russia is running out of room to cut interest rates at the moment, but could bring its benchmark below 4% if conditions change substantially, Governor Elvira Nabiullina said in an interview.

Bringing the rate to such a low level “isn’t the base case,” she said, declining to give a signal for what the bank will do at its next rate-setting meeting Dec. 18.

“We will discuss everything, because there are trends in various directions,” she said, noting that while rising Covid-19 infections are likely to pull inflation lower, some more temporary factors are working in the other direction.

Remaining room for easing “is very modest in our base case,” she said.

The central bank has kept rates on hold at 4.25% at its past two policy meetings, while leaving the door open to more easing. Analysts at the International Monetary Fund said last month that Russia should keep cutting to support the economy and that the key rate may go under 4%. They also warned that inflation is likely to fall back below the central bank’s 4% target and remain there for a long time.

Economists are split as to whether the next reduction will come as soon as next week, at some point next year, or at all. A handful of economists are forecasting rate hikes in 2021.

Consumer-price growth will reach 4.5% by year end and is unlikely to exceed 5% at the peak in February, Nabiullina said. Inflation expectations may remain elevated for some time and policy makers will factor that in when deciding on rates next week, she added.

The central bank needs to “assess carefully” whether the factors that drove the recent acceleration in inflation are temporary, but still expects disinflationary pressures to prevail next year. After a rebound in the third quarter, growth will flatten in the last three months of 2020 and beginning of 2021, she added.

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Nabiullina said earlier on Bloomberg TV that oil prices are trading at a higher level than expected, but she recognizes that there is a long-term trend for lower demand for fossil fuels. That’s why the central bank is sticking to its long-term assumption that oil won’t go above $50 per barrel, she said.

Nabiullina will speak about the challenge posed to the central bank by the pandemic at a conference later on Wednesday.

“We think that we will reach the pandemic mark in terms of the economy by the first half of 2022,” Nabiullina said on Bloomberg TV. “That gives us a base for additional easing, but it depends on many factors. We know that the situation is characterized by high uncertainty.”

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