Bank of Russia Warns on Inflation Risks As It Holds Rates

(Bloomberg) -- The Bank of Russia kept its benchmark interest rate unchanged at a third consecutive policy meeting and warned growing risks of higher inflation may limit the outlook for further monetary easing.

The key rate was kept at 4.25%, the lowest level on record, after 200 basis points of cuts earlier this year. The central bank left the door open to further monetary easing, but altered the language in the statement to suggest there may not be any further reductions.

“With headline inflation surging toward 5%, the central bank had little choice but to introduce some hawkish undertones into its statement,” said Tatiana Orlova, an analyst at Emerginomics in London. “Still, there is no hint that they could start considering rate hikes if inflation continues to rise.”

Governor Elvira Nabiullina will hold a news briefing at 3 p.m. in Moscow on Friday.

Inflation has become a political issue, with President Vladimir Putin last week ordering the government to take urgent measures to reduce prices of key staples. The central bank raised its forecast for year-end inflation to 4.6%-4.9% from 3.9%-4.2%. An estimate for the end of next year was kept at 3.5%-4%.

The central bank said pro-inflationary factors are lasting longer than expected, but monetary policy will still remain accommodative for all of next year. A handful of economists had suggested that the bank may consider a rate increase if inflation continues to climb.

What Our Economists Say:

“Soft underlying price pressure probably still favors a cut, but the central bank will need at least a few months of data before it has confidence in that outlook. That could delay its next move until March or later.”

Scott Johnson, Bloomberg Economics. Here’s the full RUSSIA REACT.

The jump in inflation was partly caused by a nearly 16% slump in the ruble this year, which has fed through into consumer prices. The currency has appreciated in the past two months, but slumped with other emerging-market currencies on Friday due to a drop in oil prices and reports of a Russian hacking campaign in the U.S.

Ten-year bonds fell for the first time in four days, lifting the yield three basis points to 5.83%.

©2020 Bloomberg L.P.