Sanctions Risk Means Russia Is Expected to Hold Rates

(Bloomberg) -- The Bank of Russia is expected to remain in wait-and-see mode at its first interest rate decision of the year on Friday as sanctions risks cloud the outlook for the ruble.

Economists haven’t been this unanimous about the outcome of a Russian rates decision since April 2019, with all 39 participants in a Bloomberg survey expecting a hold at 4.25% for a fourth straight policy meeting. The central bank didn’t give any guidance before a blackout week that started last Friday, implying they are comfortable with market expectations.

Annual inflation is expected to start easing in the coming months after it accelerated at the fastest pace in almost two years in January and the central bank will likely want to wait for more certainty about trajectory before it commits to more rate cuts. In particular, deepening tensions with the U.S. and European Union over the jailing of opposition activist Alexei Navalny could pose a threat to the ruble.

“There’s too much uncertainty for the central bank to make any moves,” said Tatiana Orlova, an analyst at Emerginomics in London.

Governor Elvira Nabiullina will hold a news conference at 3 p.m. in Moscow. The market will be looking out for signs of how she plans to proceed from here after the central bank altered the language in its statement at the last meeting in December to suggest there may not be any further reductions. Analysts at Citibank and Renaissance Capital say they are expecting at least one small rate increase later this year.

What Our Economists Say:

“The Bank of Russia still has room to cut interest rates, but the latest data suggest there’s less urgency and more risk. An extended hold is most likely, unless the recovery disappoints or inflation slows more quickly than expected.”

-- Scott Johnson, Bloomberg Economics. Here’s the full INSIGHT.

The International Monetary Fund said in a report this week that Russia should cut interest rates by as much as 50 basis points in the coming months to prevent inflation falling below the the central bank’s 4% target later in the year. The authors of the report forecast a recovery to take hold in Russia in the second half of the year after a smaller-than-expected contraction in 2020.

“Nabiullina may lean on the hawkish side to provide the ruble a thin layer of insulation from the risk of a new set of sanctions,” said Piotr Matys, a strategist at Rabobank in London. “The sharp rise in inflation limits room to lower interest rates.”

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