economy

Bank of Russia says easing over for 2016 after second cut

The one-week auction rate was lowered to 10% from 10.5%, according to a statement on Friday

Bloomberg
18:30 September 16, 2016

Moscow: Russia’s central bank reduced borrowing costs after a three-month pause and said its key interest rate will remain on hold for the rest of the year to keep a lid on prices before easing can resume again.

The one-week auction rate was lowered to 10 per cent from 10.5 per cent, according to a statement on Friday. Thirty-seven of 42 economists surveyed by Bloomberg predicted the move, while five saw no change. Governor Elvira Nabiullina will hold a news conference at 3pm in Moscow.

“The current key rate needs to be maintained until end-2016 with a possibility to cut” in the first or second quarters of 2017, the central bank said in the statement. “The risks of failure to deliver inflation at the 4 per cent target in 2017 persist mainly due to the inertia of inflation expectations and potential weaker household saving motives.”

The Bank of Russia has its reputation on the line as it looks to rein in inflation to 4 per cent by the end of 2017 after overshooting its price forecasts in 2015 for a fourth year. With a favourable base effect from last year’s spike dissipating, policymakers have warned that fiscal uncertainty and rising wages risk reigniting price growth.

‘Hawkish Easing’

“We can add a new phrase when commenting about the monetary policy in Russia: ‘hawkish easing,’” said Piotr Matys, a currency strategist at Rabobank in London. “It’s not only about the outlook for inflation and the real economy, but we also see the risk of excessive capital inflows fuelled by an attractive rouble carry trade as the central bank is clearly reluctant to cut rates far more aggressively.”

The strategy of buying Russia’s currency using borrowed dollars returned more than 21 per cent this year, the best result after Brazil, according to data compiled by Bloomberg. That has sent the rouble on a 13 per cent rally against the dollar in 2016, behind only Brazil’s real and the yen globally, according to data compiled by Bloomberg. The Russian currency trimmed losses after the decision and traded 0.4 per cent weaker at 65.02 against the dollar as of 1.43pm in Moscow.

Derivatives traders further scaled back their bets for a rate cut in the next three months after the announcement. Forward-rate agreements fell to 29 basis points, down from this month’s high of 71 basis points.

‘New reality’

Nabiullina said in an unscheduled speech last week that the Bank of Russia will continue its “moderately tight” monetary policy, with the inflation rate now below its benchmark for the past eight months. Warning that positive real rates are “a new reality” for Russia, the central bank wants to encourage higher savings and their transformation into investment while pushing companies to streamline their businesses instead of counting on price increases.

Its goals are aligning with the government’s aim to shift to an investment-growth model after the crash in oil and the rouble crisis pushed the economy into the longest recession in two decades. Lauded by Morgan Stanley as the “most orthodox” central banker in developing Europe, Nabiullina has previously pledged to keep the benchmark rate up to three percentage points above headline inflation to anchor expectations.

Consumer-price growth eased to 6.9 per cent in August from a year earlier, the lowest rate since March 2014. Inflation expectations, which central bankers often cite as one of the main obstacles for disinflation, fell noticeably in August to the lowest in almost two years.

Worse outlook

The central bank worsened its outlook for economic growth next year to less than 1 per cent, compared with gains of 1.1 per cent to 1.4 per cent seen in June. It estimates inflation was at 6.6 per cent from a year earlier on September 12, predicting price growth will reach 4.5 per cent next September before slowing to the 4 per cent target in late 2017.

Economists surveyed by Bloomberg see inflation slowing to 6.3 per cent by the end of this year and forecast the economy will expand 1.3 per cent in 2017, returning to growth after two years of contraction.

While “the decision is very welcome, the overcautious tone is disappointing,” said Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki. “All eyes on Nabiullina’s conference.”