MOSCOW: The Bank of Russia reduced borrowing costs for the first time since September, a surprise for most economists because it broke with guidance last month that called into question its room for easing in the first half.
The one-week auction rate was cut to 9.75 per cent from 10 per cent, policymakers said in a statement on Friday. Eleven of 41 economists surveyed by Bloomberg predicted reductions of a quarter or a half percentage point, while the rest saw no change. Governor Elvira Nabiullina will hold a news conference at 3pm in Moscow.
“The inflation slowdown is overshooting the forecast, inflation expectations continue to decline and economic activity is recovering,” the central bank said in the statement. It sees “the possibility of cutting the key rate gradually in the coming second and third quarters.”
The central bank is pivoting in response to a faster-than-forecast decline in inflation that’s keeping it on track to reach its 4 per cent target months ahead of a year-end deadline. Russia’s most contentious rate decision since last July shows more dovish views carried the day after the head of the central bank’s monetary-policy department took the unusual step of acknowledging that alternative paths for rates were under consideration.
“A cut is an objective necessity, given the inflation slowdown, a lack of significant positive changes in consumer demand and the situation on the foreign-exchange market,” Sergey Narkevich, an analyst at Moscow-based Promsvyazbank PJSC who predicted a decrease of 25 basis points, said before the announcement. “Such a cut is needed to jump-start the real sector, credit and consumer activity, and also to reduce the attractiveness of rouble assets for speculators.”
Last month’s weak economic performance improved the case for lower rates. Industrial output unexpectedly fell for the first time since January 2016, while retail sales contracted for a record 26th month.
In Demand
The reboot of monetary easing is likely to do little to cool demand for Russian assets, which have been swept up by a surge in investor appetite for emerging-market stocks and bonds since the Federal Reserve laid out a relatively dovish outlook for US rate increases at its meeting last week. Analysts at Credit Suisse Group AG estimate that foreigners have bought about $1 billion of rouble bonds so far this month.
Elevated rates in Russia have made the rouble a magnet for carry traders as borrowing costs remain near historic lows across developed economies. The Russian currency, among the top-10 performers globally this year, is up about 3 per cent since the central bank last met in February. The rouble traded 0.1 per cent weaker at 57.4 against the dollar after the announcement.
The Bank of Russia has previously been on alert because it attributed the deceleration in prices partially to “temporary” factors. Even so, consumer-price growth in February slowed to 4.6 per cent from a year earlier, while annualised inflation may already be running below the 4 per cent goal. In the history of modern Russia, the annual index was below 5 per cent for only six months in 2012, when authorities pushed back increases in utility rates.
Great Expectations
The challenge remains to align the slowdown with inflation expectations, which rose last month to more than triple the target. Other risks for price growth include the oil market, the harvest’s performance and the global food market, according to Igor Dmitriev, head of the central bank’s monetary policy department.
Even with a rate cut, the central bank “will try not to create false expectations of the start of an easing cycle, and will be restrained in promises,” Evgeny Koshelev, an analyst at Societe Generale SA’s Rosbank PJSC in Moscow, said before the decision.
