Bank of Russia readies for sprint to looser policy with rate cut

One-week auction rate was lowered to 7.5% from 7.75%

19:15 February 9, 2018

MOSCOW: Russia’s central bank reduced interest rates for the fourth meeting in a row and said it may complete its move to looser monetary policy a year earlier than planned.

The balance of risks has shifted “slightly” toward those to economic growth, and a transition from moderately tight to neutral monetary policy may be completed already in 2018, according to a statement on Friday. The one-week auction rate was lowered to 7.5 per cent from 7.75 per cent, in line with most forecasts, following a cut of half a percentage point in December.

The Bank of Russia is preparing for faster policy change after inflation slipped below its target of near 4 per cent and the economic recovery showed signs of sputtering. Governor Elvira Nabiullina has previously said the key rate was likely to reach its nominal equilibrium level of 6 per cent to 7 per cent only in 2019.

“This year, annual inflation is much less likely to exceed 4 per cent,” the central bank said in the statement. “In this environment the Bank of Russia will continue to reduce the key rate.”

In another departure, policymakers tweaked their assessment of inflation, warning that “permanent factors may have stronger effect on inflation than previously estimated.” The central bank has earlier attributed a record slowdown in price growth to the temporary effects of a strong rouble and a bumper harvest.

The statement “introduced rather strong dovish forward guidance saying that the shift to neutral policy might be completed in 2018,” said Dmitry Polevoy, an economist at ING Groep NV in Moscow. Real rates will still remain “relatively high versus other emerging-market peers, so we don’t see big risks to the rouble from this dovish shift.”

The rouble was 0.5 per cent stronger against the dollar at 2:48pm in Moscow. It’s weakened over 2 per cent this week, the worst performance in emerging markets, as oil prices retreated. Last year, Russia’s currency gained more than 6 per cent, helping bring down inflation.

Risk Aversion

“The rouble strengthened initially as the Russian central bank refrained from delivering a larger cut, which in the current global environment dominated by risk aversion would be a risky move,” Piotr Matys, a strategist at Rabobank in London, said by email.

Annual consumer-price growth decelerated to a record-low 2.2 per cent in January but inflation expectations for the year ahead ticked up to 8.9 per cent. The key rate may reach 6.75 per cent by the end of this year, according to economists in another Bloomberg survey.

“If oil holds through 2018, and geopolitically there are no big surprises, the key rate is likely to go under our conservative scenario 6.75 per cent by end-2018,” said Vladimir Miklashevsky, senior economist at Danske Bank A/S in Helsinki.