(Bloomberg) — Russia’s central bank held interest rates on Friday and retained a hawkish bias that leaves the option for hikes later in the year.
(Bloomberg) — Russia’s central bank held interest rates on Friday and retained a hawkish bias that leaves the option for hikes later in the year.
Extending a pause in place since September, policymakers kept their benchmark at 7.5%, in line with the forecasts of all economists surveyed by Bloomberg. Governor Elvira Nabiullina will speak at a news conference at 3 p.m. in Moscow.
The central bank is looking past a steep slowdown in inflation below its 4% target because of risks to consumer prices as the war in Ukraine transforms the economy by draining labor resources and forcing the government to ramp up spending.
“Given gradually rising inflationary pressures, the Bank of Russia’s forthcoming board meetings will consider the necessity of a key rate increase to stabilize inflation close to 4% in 2024 and further on,” policymakers said in a statement.
The central bank also updated its economic forecasts and now sees inflation in a range of 4.5%-6.5% at year-end, down slightly from its preview view of 5%-7%.
What Bloomberg Economics Says…
“Starting in July, if public spending continues to expand and retail lending picks up, we believe the central bank may have enough data to start tightening.”
—Alexander Isakov, Russia economist. For more, click here
The dilemma for Nabiullina is how to time a withdrawal of monetary stimulus. Though facing little pressure to act, the Bank of Russia is having to contend with a sharp liftoff of fiscal spending, a deterioration in trade and a record dearth of workers.
The outlook is so uncertain that it’s left the market split over the direction of policy.
While most analysts forecast the key rate will remain on hold this year, economists at banks including UBS Group AG and Goldman Sachs Group Inc. see a hike in the coming months. Renaissance Capital and S&P Global are among those predicting a cut.
Remaining ‘Subdued’
“We expect price growth to remain subdued until the end of the year, which, along with a decline in inflationary expectations, will allow the Bank of Russia to resume its easing cycle, most likely in the third quarter,” Sofya Donets, economist at Renaissance Capital, said in a note.
Among the more immediate concerns are developments in the labor market that threaten to push up real wages. A central bank survey found that companies in the first quarter experienced the biggest worker shortage since monitoring began in 1998.
An equal worry is the stretched budget, with its shortfall as of April 25 already almost 50% wider than the Finance Ministry’s full-year target for 2023.
The prospect of a hawkish turn in policy still appears remote with inflation in Russia now well below levels seen in the US and the Eurozone.
Price-growth expectations for a year ahead, a key factor for policymakers, have dropped to the lowest since early 2021. Muted domestic demand and caution by consumers are also helping keep inflation in check.
Blamed for Putin’s Inflation Abroad, Russia Sees Prices Cool
“Pro-inflationary risks are still just risks,” Donets said. The build-up of price pressures might be of little concern for now as consumer activity is recovering “quite smoothly” amid growing real wages, she said.
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