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Russia Hits Brake on Rate Cuts, Sees Further Easing Possible

Russia’s central bank paused its monetary easing cycle saying an interest-rate cut was still possible.

Russia Hits Brake on Rate Cuts, Sees Further Easing Possible
An taxi stands in traffic outside the headquarters of Bank Rossii, Russia’s central bank, in Moscow, Russia. (Photographer: Andrey Rudakov/Bloomberg)

Russia’s central bank paused its monetary easing cycle after renewed sanctions jitters contributed to a surprise inflation uptick, but left the door open to an interest-rate cut at one of its next meetings.

After three back-to-back cuts, Governor Elvira Nabiullina held the benchmark interest rate at 4.25% on Friday, in line with expectations. Only four out of 42 analysts forecast a rate reduction, with the rest predicting no change, according to a Bloomberg survey.

“For the most part, our easing cycle is complete,” she said at a press conference in Moscow after the meeting. “We still see some room for cutting the key rate, but we’ll assess the timing and the need to use this possibility.”

Geopolitical risks contributed to a weaker ruble and fanned inflation along with increased demand as Russia’s coronavrius lockdown ended, the central bank said in a statement. Though the recovery has been faster than expected, Nabiullina kept the possibility of further easing on the table and said the rebound may flag as the impact of government support ebbs.

Russia Hits Brake on Rate Cuts, Sees Further Easing Possible

Russian policy makers are joining their emerging-market peers from Poland to Indonesia, Brazil and South Africa, who left their rates on hold this week amid signs of quickening price growth. In Russia, the renewed specter of sanctions hit the ruble and contributed to a faster-than-forecast inflation rate last month.

“Formally, the central bank left the door open for another small reduction, but the inflation trend and the exchange rate will most likely prevent it from doing so,” Renaissance Capital Chief Economist Sofya Donets said in Moscow.

Russia’s inflation rate is still below target, but short-term inflationary risks have increased and the pace of price growth accelerated to 3.7% as of Sept. 14, according to the central bank. That’s still below the regulator’s 4% target, but the rate has been accelerating since January.

Market reaction to the decision was muted. The ruble initially held on to gains before retreating in line with a drop in the price of crude, Russia’s key export earner. Ten-year ruble bond yields were little changed at 6.18%.

The Russian currency is down more than 5% this quarter, one of the worst performers in developing nations, on concern Moscow may face new international penalties in response to the poisoning of opposition leader Alexey Navalny and Kremlin support for Belarus’s embattled president. The coming U.S. election means the tensions are unlikely to ease soon.

What Our Economists Say:

“The uptick in inflation sounds like the rationale for bringing the easing cycle to an end, but it’s really the context that matters. Optimism about the economy and worries about political risk are the bigger factors here.”

----Scott Johnson, Bloomberg Economics

Russian markets have flagged the dimming chances of a further cut for weeks. Derivatives traders have pared their bets for a reduction, with forward-rate agreements showing no more easing in the next three months. Benchmark bonds, the worst performers behind Turkey in the quarter, have been edging lower since May.

“The decision to leaving the rate unchanged is in line with the broad trend among central banks as economies emerge from recession,” said Alexander Losev, Chief Executive Officer at Sputnik AM in Moscow. “Time is needed to assess the efforts made earlier, and Bank of Russia is no exception.”

©2020 Bloomberg L.P.