Russian central bank to hold rate at 7.5%, inflation pressure looming

By Elena Fabrichnaya and Alexander Marrow

MOSCOW (Reuters) – The Russian central bank is expected to hold rates at 7.5% on Friday, a Reuters poll showed, with the risk of inflationary pressure picking up limiting the bank’s room for manoeuvre on any monetary easing.

Last year, the bank gradually reversed a late February emergency rate hike to 20% after Moscow despatched tens of thousands of troops to Ukraine, which led to increasingly wide-ranging Western sanctions being imposed in response.

The key rate has stayed at 7.5% since the last cut in September, with inflation risks, such as a weaker rouble, a widening budget deficit and labour shortages, leading the Bank of Russia to warn that rate hikes are more likely than cuts.

All 23 analysts and economists polled by Reuters predicted that Russia would keep its benchmark rate unchanged again on Friday.

The central bank will likely signal a readiness to hike later in the year, said Mikhail Vasilyev, chief analyst at Sovcombank, forecasting the year-end key rate at 9%.

“Current inflation dynamics do not call for a rate hike, but pro-inflationary risks are increasing,” he said. “In this situation the central bank will likely again adopt a watchful position.”

The rouble is around 5% weaker against the dollar since the bank’s last meeting in mid-March, he said, while labour shortages are the most significant risk.

The situation is quite unusual, said Olga Belenkaya of Finam brokerage, with annual inflation below 3% due to the high base effect of last year’s price rises, but the risks of higher inflation in the future increasing.

“The intrigue, in our view, is whether the tight signal of the last two meetings will remain unchanged or whether its tone will be adjusted,” she said.

As of April 17, annual inflation was running at 2.82%, according to the economy ministry, well below the central bank’s 4% target. But the bank still expects inflation to end the year at 5%-7%.

Governor Elvira Nabiullina last week said inflationary risks must decrease in order to create room for interest rate cuts.

(Reporting by Elena Fabrichnaya; Additional reporting and writing by Alexander Marrow; Editing by Alison Williams)