Bank of Russia Boxed In on Rates by Ruble and Economy

Russia’s emergency interest-rate hike a month ago hasn’t taken another increase off the table at the central bank’s regularly scheduled meeting this week.

(Bloomberg) — Russia’s emergency interest-rate hike a month ago hasn’t taken another increase off the table at the central bank’s regularly scheduled meeting this week.

The decision will likely come down to just how much pain the Bank of Russia is willing to inflict on the economy, after the odds of recession rose sharply following its 3.5 percentage-point move in August. Tighter policy remains warranted as the ruble is under pressure and the inflation outlook is deteriorating.

Economists polled by Bloomberg are almost evenly split over what the central bank might do on Friday, with most predicting the key rate will stay at 12%. 

But a sizable minority that includes ING DiBa, MUFG Bank and Bloomberg Economics expect a hike of between half a percentage point and 150 basis points. Money markets are implying a hike to 13%, according to calculations by Bloomberg Economics.

The policy announcement is due at 1:30 p.m. in Moscow and will be accompanied by updated macroeconomic forecasts. Governor Elvira Nabiullina will later comment on the decision at a news conference. 

The reluctance by officials to stiffen restrictions on the movement of capital is leaving the central bank with few options apart from higher rates as price growth breaches its 4% target while the wartime economy is running at full steam despite sanctions. Although the steep rate hike briefly halted declines in the ruble, it’s remained weak and volatile, a further threat to inflation by making imports more expensive.

“Given the Bank of Russia’s determination not to tighten capital controls, the only way they can provide support to the ruble is via rate hikes,” said Tatiana Orlova of Oxford Economics, who predicts an increase of 100 basis points. “The reason is that the ruble still appears a bit fragile.”

While the currency hasn’t reached the symbolic mark of 100 per dollar it broke last month, it’s still down over 2% since late August. The ruble is benefiting slightly from a temporary acceleration of foreign-exchange sales by the central bank in mid-September, which it said were needed because a government Eurobond is coming due this week.

What Bloomberg Economics Says…

“To firm the wobbly ruble, money markets expect the central bank to increase the policy rate to a peak of 13%. We agree that would likely be the end of the hiking cycle. In the past, the market has provided a robust gauge for the rate path, and we believe the central bank will side with it over analysts this time, as well.”

—Alexander Isakov, Russia economist. For more, click here

Nabiullina hasn’t provided much clarity to the market, only saying the central bank telegraphed a “neutral” signal after its last meeting, meaning both a hold and a hike are now possible. Future moves will hinge on incoming data, the governor said, with lending growth, the exchange rate and fiscal stimulus among key variables.

“The Bank of Russia can logically justify almost any decision, perhaps with the exception of reducing the key rate,” analysts at Rosbank in Moscow said in a report that described a hold as slightly more likely on Friday. “No less important will be decisions and comments concerning the stabilization of the foreign exchange market.”

In a surprise release during its week-long communication blackout before a policy meeting, the central bank on Wednesday published inflation expectations of companies — whereas it previously tended to issue surveys of sentiment among households ahead of a rate decision.

The indicator plays a critical role in shaping policymaking, and the latest results showed price expectations by businesses are at the highest in over a year. Consumer inflation has also quickened for four straight months in annual terms, exceeding 5% in August.

President Vladimir Putin this week called the emergency rate decision timely and appropriate, sounding reassured about the ruble by describing the currency’s swings as “manageable” and not in need of more extreme measures.

But in a sign confidence is lacking, the Russian currency pared gains as Putin spoke. It’s lost nearly 23% of its value against the dollar this year, the worst depreciation in emerging markets after the Turkish lira and Argentina’s peso.

Another rate hike may be too costly for an economy still adapting to sanctions over the Ukraine invasion and powered to a large extent by budget spending and a boost in military production.

The hike in August already more than tripled the odds of recession in the next six months to around 20%, according to Bloomberg Economics, which estimates they could approach 40% if rates rise further.

Monetary easing may resume already this year “to avoid economic recession,” according to Roberto Mialich, a foreign-exchange strategist at UniCredit SpA.

“Risks, however, are skewed upwards,” he said in a report. “The Russian central bank seems to be hawkish against inflation risks despite possible risks to growth.”

(Updates with Bloomberg Economics comments starting in fourth paragraph.)

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