Russia Says More Tightening Possible After Modest Rate Hike

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A smaller-than-forecast rate hike doesn’t mean the Russian central bank is turning dovish, with inflation at its fastest pace in half a decade. 

While Friday’s quarter-point increase marks a return to more standard rate moves after July’s 100 basis point hike, Governor Elvira Nabiullina said it’s not a given that the next rate raise will end the central bank’s tightening cycle. Ultimately, the key rate could be taken above 7% in several steps in order to get inflation back to the regulator’s target, she said. 

“The situation could develop in such a way that it may take more than one further increase to return inflation to 4%,” Nabiullina told a press conference after the decision. “In that sense, you could say our message has become somewhat harsher.” 

Nabiullina has now boosted rates by a total of 250 basis points this year -- one of the most aggressive tightening paths in emerging markets. She must weigh data that suggest Russia’s economic recovery is faltering against price pressures from 700 billion rubles ($9.6 billion) of pre-election government spending as she seeks to tame an inflation rate that reached 6.7% in August.

“Though the tone of the statement was milder than the previous one, the central bank governor’s comments at the press conference came in tougher,” said Sergey Konygin, chief economist at the Sinara investment bank. The market can no longer assume the key rate won’t exceed 7%, and the “return of uncertainty” will be negative for government bonds, he said.

Sixteen economists in a Bloomberg survey of 44 correctly forecast Friday’s move, while 27 expected a bigger move and one expected no change.

What our economists say:

“We expect the data to support only one more quarter-point move, but we can’t rule out further increases after October. That’s more hawkish than we expected, even considering the smaller increase in the key rate.”

--Scott Johnson, Bloomberg Economics

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Despite the concerns cited by Konygin, ten-year bonds edged higher for a third day, having erased declines after the decision. The yield was down one basis point at 7.01% as of 5:09 p.m. in Moscow. The ruble traded up 0.1% against the dollar, while forward-rate agreements pointed to 32 basis points of tightening in the coming three months.

Inflation is set to accelerate further and peak in September at 6.9%, before slowing to about 6% by the end of the year, according to Goldman Sachs Group Inc. analyst Clemens Grafe.

“Given high inflation expectations, the balance of risks for inflation is tilted to the upside,” the central bank said in its statement.

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