Russia to Hold Rates as Prices Keep Rising

The Bank of Russia looks set to keep interest rates at 4.25% at a third consecutive policy meeting Friday as inflation continued to increase above target.

Futures markets were betting on a small cut as recently as last week, but those bets shifted after Governor Elvira Nabiullina said price growth isn’t likely topeak until February. Just four of the 44 economists polled in a Bloomberg survey are expecting a reduction, with the rest predicting a hold.

Nabiullina has left the door open to more monetary easing, but said in an interview last week that the room for further cuts is “very modest.” Annual inflation will reach 4.5% by year end and is unlikely to exceed 5% at the peak in February, she said. The central bank targets price growth of 4%.

The jump was partly caused by a 15% slump in the ruble this year, which has fed through into consumer prices. The currency has appreciated in the past two months, but Nabiullina said last week that inflation expectations may remain elevated for some time.

“The Bank of Russia seems very keen to maintain dovish bias even though it would be wrong to cut its policy rate right now,” said Tatiana Orlova, an analyst at Energonomics in London. “The stronger ruble boosts the case for further easing if and when it suits the central bank.”

Surging food prices have become a political issue, with President Vladimir Putin last week ordering the government to take urgent measures. Authorities imposed a tax on wheat exports and price controls on some other staples.

What Our Economists Say:

“The central bank has room for at least another quarter-point of easing, but policy makers also have doubts. Uncertainty in the inflation outlook is likely to delay the next rate cut to February.”

— Scott Johnson, Bloomberg Economics. Here’s the fullINSIGHT.

Analysts at the International Monetary Fund said last month that Russia should keep cutting rates 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 target and remain there for a long time.

Growth has flattened in the last few months of 2020 after a rebound in the third quarter. The economy is on track to contract 3.9% this year before rebounding 3% in 2021, according to another Bloomberg survey.

“A rate cut would make more sense to me given that the ruble is performing well and the outlook remains challenging for the Russian economy,” said Piotr Matys, a strategist at Rabobank in London. Recent comments from central bank officials imply a hold is more likely though, he said.

— With assistance by Zoya Shilova

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