Russia’s central bank, taking advantage of a record ruble rally and slowing inflation, cut interest rates for a third time this year to counter a looming recession and said it’s ready to ease further.
The central bank in Moscow cut the benchmark one-week auction rate to 12.5 percent from 14 percent, it said in a statement on its website Thursday. Ten of 40 economists surveyed by Bloomberg predicted the move, while the majority forecast a smaller reduction.
Policy makers led by central bank Governor Elvira Nabiullina are accelerating rate cuts to unwind an unprecedented increase to 17 percent in December. Having ended Russia’s worst currency crisis 16 years, their focus is shifting to the economy. The world’s largest energy exporter has been hammered by last year’s slump in oil prices and sanctions over President Vladimir Putin’s policies in the conflict of neighboring Ukraine.
“The Russian central bank looks to be consistent in its monetary policy after the U-turn in January 2015 when it took into account economic prospects,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail.
The ruble’s biggest monthly rally since 1993 is paving the way for faster easing after the regulator followed a surprise two-point reduction in January by lowering the benchmark by a percentage point in March. The Russian currency has strengthened 18 percent against the dollar this year after losing almost half its value in 2014. It traded 0.9 percent weaker at 51.52 per dollar as of 2:50 p.m. in Moscow.
The ruble’s strength is helping slow inflation, and “with other things being equal and no new significant negative factors,” that will allow a rate cut, Nabiullina said April 16 in Washington.
Ruble, Inflation
“Amid ruble appreciation and a significant contraction in consumer demand in February-April 2015, monthly consumer price growth is declining and annual inflation is tending to stabilize,” the central bank said in the statement. “As inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate.”
The prospect for a continuation of the easing cycle helped drive Russian bonds higher on Thursday, pushing yields on five-year notes down 32 basis points to 11.06 percent. Russian local-currency debt handed investors 39 percent returns in 2015, the most in the Bloomberg Emerging Market Local Sovereign Index.
Inflation, which polls indicate is among the biggest concerns for Russians, accelerated to 16.9 percent from a year earlier in March. Price growth eased to 16.5 percent as of April 27 and will reach 8 percent next April, the central bank said in the statement, adding that inflation will slow “faster than expected.”
Derivatives traders also see borrowing costs falling, with forward-rate agreements signaling 175 basis points of decreases in the next three months, the most since the end of March.
Faster Slowdown
The ruble’s collapse last year and Russia’s ban on some food imports in retaliation for sanctions over the conflict in Ukraine contributed to inflation more than doubling from the start of last year. The central bank’s medium-term inflation target is 4 percent for 2017.
Policy makers opting for a deeper cut shows that they are less concerned with inflationary pressures, with more attention to the risks posed by the ruble’s gains, Piotr Matys, a London-based foreign-exchange strategist at Rabobank, said by e-mail.
While helping curtail inflation, a strong ruble “could also undermine prospects for exports -- the only source of growth for the economy,” Matys said.
Gross domestic product contracted 2.2 percent in the first quester from a year earlier, the Economy Ministry said in a report Wednesday. GDP may expand 2.3 percent in 2016 after a contraction of 2.8 percent this year, Economy Minister Alexei Ulyukayev said April 23. The ministry previously saw a 3 percent contraction in 2015.
“It appears that interest rates are likely to fall faster than we had anticipated,” Neil Shearing, the chief emerging-market economist at Capital Economics Ltd. in London who predicts the benchmark will fall to 9 percent by the end of next year, said in an e-mailed note. “With currency risks still lurking in the background, the scope for aggressive easing is limited. In other words, the end point remains unchanged, we just get there slightly faster.”
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