Russia Holds Rate With Inflation in Focus Ahead of Elections

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(Bloomberg) -- Russia’s central bank held interest rates unchanged for the first time since June, as it pivots from a cycle of monetary tightening that more than doubled borrowing costs in the second half of last year.

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Meeting for the last time before March presidential elections, policymakers left their key rate at 16% on Friday, in line with the forecasts of all economists surveyed by Bloomberg.

Speaking after the decision, Governor Elvira Nabiullina said the central bank is sending what she called a “neutral” signal on the future direction of policy, with most members of the rate-setting board only seeing a cut as likely in the second half of the year.

“We see room to reduce the key rate, but our forecast assumes that the rate will return to neutral levels in a smooth manner,” Nabiullina told reporters in Moscow.

A slowdown in inflation unexpectedly stalled last month, leaving it at almost twice the 4% target after a spike in fruit and vegetable prices. Though Vladimir Putin faces little challenge as he seeks a new term almost two years after Russia’s invasion of Ukraine, a higher cost of living is a concern in a country where respondents in a recent poll named inflation second only to severe health problems among their biggest fears this year.

Alongside its rate announcement on Friday, the Bank of Russia also unveiled its updated outlook, which left this year’s inflation forecast unchanged and projected a higher trajectory for rates.

“The return of inflation to target in 2024 and its further stabilization close to 4% assume that tight monetary conditions will be maintained in the economy for a long period,” the central bank said in a statement. “Over the medium term, the balance of inflation risks is still tilted to the upside.”

The year’s first meeting is ushering in changes in how the central bank communicates its decisions and rationale, as part of an effort make monetary policy more transparent. For the first time, it will start to publish a summary of discussions held just ahead and during rate meetings, issuing it on the sixth working day after each decision.

What Bloomberg Economics Says...

“The Bank of Russia’s decision to keep its policy rate unchanged at 16% means Russia’s economy is headed toward a slowdown. There’s no rush for the central bank to lower rates as the economy remains hot — retail sales in December was up 10% year on year and the unemployment rate is at its lowest in Russia’s modern history.”

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

Following a run-up in consumer costs last year, Russian rates have returned to levels last seen in the first months after the February 2022 invasion of Ukraine. Nabiullina has warned she sees room for monetary easing no earlier than in the second half of 2024.

A rate cut before June is possible only if inflation proves to be in check and domestic demand slows, said Dmitry Polevoy, investment director at Astra Asset Management.

“Inflationary pressures are decreasing, but the target is still far away, and inflation expectations remain elevated,” said Sofya Donets, an economist at Renaissance Capital.

With the government spending heavily on the war effort, looser policies contributed more to inflation over the past three months than supply-side issues linked to restricted access to goods, according to Bloomberg Economics.

A weaker ruble also put strain on the price of products ranging from cars to eggs, adding to pressure from higher consumer demand stoked by growing wages and a boom in lending.

Spillovers from the war will remain an obstacle to disinflation as acute labor shortages drive up salaries. Though price expectations among households dropped below 12% in February, they remain elevated by historical standards and present a “deterrent to the start of an easing cycle,” according to Donets.

Annual inflation accelerated slightly to 7.57% in the seven days to Feb. 12, from 7.27% a week earlier, the Economy Ministry estimates.

“Until late last year, expectations had been that rate hikes may have to continue further, but inflation momentum has visibly decelerated since,” Tatha Ghose, an economist at Commerzbank AG, said in a report. Still, last month’s pick-up in price growth “is a strong reason why the central bank will probably not begin rate cuts anytime soon.”

(Updates with Nabiullina’s comments starting in third paragraph.)

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