Russia’s central bank kept its benchmark interest rate unchanged for a fifth meeting amid risks to inflation, warning that its “moderately tight” monetary policy may last longer than previously planned. The ruble reversed losses after the announcement.
The one-week auction rate will remain at 11 percent, the Bank of Russia said in a statement on Friday. Thirty-five of 42 economists predicted the move, with the rest forecasting a reduction to 10.5 percent, according to a Bloomberg survey. Governor Elvira Nabiullina will hold a news conference at 3 p.m. in Moscow, and policy makers will also issue updated economic forecasts.
“The central bank has become much more consistent in its policy by not yielding to the euphoria of ruble strengthening,” said Yury Tulinov, head of research at Societe Generale SA’s unit Rosbank PJSC in Moscow.
A second year of recession and gains in oil and the currency aren’t tipping the balance in favor of easing because inflation expectations remain stubbornly high. Looking past the ruble’s rally of more than 11 percent since the last meeting, the central bank defied expectations that its rhetoric will turn dovish after a warning in January that it may tighten monetary policy if threats to price growth intensify.
Longer Hold?
“The Russian central bank not only opted to keep rates unchanged at 11 percent, but the official statement actually implies that rates may remain on hold for longer,” said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London.
With oil prices having partially recovered after dipping below $30 a barrel this year, the ruble has also advanced from January’s all-time low. It’s gained about 20 percent against the U.S. dollar since then, remaining one of the world’s most volatile currencies, data compiled by Bloomberg show.
The ruble strengthened 0.1 percent at 1:38 p.m. in Moscow after weakening as much as 0.9 percent before the rate decision. Yields on government notes due in five years rose were unchanged at 9.2 percent after a 30 basis point drop yesterday, the most since Oct. 6. Brent crude rose 1 percent to $41.94 per barrel.
“Despite a certain stabilization in financial and commodity markets and a slowdown in inflation, inflation risks remain high,” policy makers said in their statement. With Russian lenders showing less demand for the central bank’s refinancing, “we see a softening of monetary conditions, impacted by reduced structural deficit of liquidity, even if the key rate is unchanged.”
On Target?
While price growth has slowed for six months, it’s still more than twice the bank’s medium-term target of 4 percent. Inflation will be less than 6 percent a year from now, although “risks remain” that the rate may exceed its goal in late 2017, the central bank said on Friday.
Also feeding the uncertainty is fiscal policy, with the government now reviewing this year’s budget, which is currently based on an average oil price of $50 a barrel. The Finance Ministry is struggling to hold the deficit to 3 percent of gross domestic product, which would be the widest in six years.
A failure to keep the budget gap under control will increase pressure on money supply and may eventually push the central bank to raise borrowing costs, according to Finance Minister Anton Siluanov.
The central bank said the economy’s adjustment to low commodity prices will continue, with gross domestic product forecast to shrink 1.3 percent to 1.5 percent this year. On a quarterly basis, GDP will resume growth between late 2016 and early next year, it said. The economy contracted 3.7 percent last year.
“The moment was appropriate for a rate cut,” said Olga Sterina, an analyst at UralSib Capital in Moscow. “The rate at 11 percent seems high with such a weak economic performance and slowing inflation.”
(Updates with economist comments starting in third paragraph.)
--With assistance from Zoya Shilova and Anna Andrianova To contact the reporters on this story: Olga Tanas in Moscow at otanas@bloomberg.net, Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net, Olga Voitova in Moscow at ovoitova@bloomberg.net. To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Paul Abelsky, Andrew Langley
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