Russia Ditches Rate Cuts as Sanctions Risks Cloud Outlook

(Bloomberg) -- The Bank of Russia signaled it won’t consider further monetary easing after it kept interest rates on hold for a fourth straight policy meeting as sanctions risks clouded the outlook for the ruble and inflation.

The benchmark rate was held at 4.25% on Friday, as forecast by all 39 economists in a Bloomberg survey. Governor Elvira Nabiullina will hold an online news briefing at 3pm Moscow time.

The central bank will “determine the timeline and pace of a return to neutral monetary policy” if the situation develops in line with the baseline forecast, the central bank said in a statement. “Disinflationary risks no longer prevail over a one-year horizon.”

A 2021 inflation forecast was raised to 3.7%-4.2% from 3.5%-4%.

Annual inflation is expected to start easing in the coming months after it accelerated to 5.2% in January, the fastest pace in almost two years. Deepening tensions with the U.S. and European Union over the jailing of opposition activist Alexey Navalny could pose a threat to the ruble, which has struggled to keep up with recent gains in the price of oil, Russia’s main export earner.

“The message from the central bank is slightly more hawkish than before, which is an attempt to provide the ruble with some support in case the EU in cooperation with the U.S. decides to impose sanctions on Russia,” said Piotr Matys, a strategist at Rabobank in Moscow.

What Our Economists Say:

“The hawkish shift in guidance raises the risk of tightening in 2021, especially if inflation fails to slow in the coming months. But an extended hold seems more likely, with demand still relatively weak and fiscal stimulus set to be withdrawn.”

-- Scott Johnson, Bloomberg Economics.

The “constraining effect” of the pandemic on the economy was much less than expected, and that will add to inflationary pressures, the central bank said. Russia suffered a smaller contraction than expected last year and has already begun lifting many coronanvirus restrictions. The bank forecasts GDP growth at 3%-4% for this year and 2.5%-3.5% for next year.

The ruble held onto earlier declines, trading down 1.1% at 74.4075 per dollar as of 2:16 p.m. Yields on 10-year local notes were up for a fourth day, increasing 8 basis points on Friday to 6.5%.

“The central bank is preparing the market to the idea that we can see rate increases in 2021,” said Sofya Donets, an economist at Renaissance Capital in Moscow.

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