Russia’s Rate Cuts May Already Be Over as Inflation Speeds Up

Russia’s rate cutting cycle may already be at an end, after a wobbly ruble has helped boost inflation and the economy has shown signs of recovery.

Traders are expecting no more rate cuts in the next three months, according to forward-rate agreements, though some economists see the central bank making one more 25 basis-point reduction before the end of the year.

“Economic activity is pushing up, and so is inflation,” TD Securities analyst Cristian Maggio said by email. He predicts the Bank of Russia will keep rates on hold in the “reasonably foreseeable future.”

All but four of 42 economists are now forecasting a hold on Friday after Bank of Russia Deputy Governor Alexey Zabotkin said last week that policy makers will weigh whether they should use the remaining easing space at all.

A hold this week would keep Russia in line with a pattern across emerging markets, as peers such as Malaysia and Ukraine kept rates unchanged this month. Russia’s economy is faring better than some emerging markets because it has a smaller service sector, which coronavirus lockdowns have hit hardest.

Bank of Russia Governor Elvira Nabiullina will hold a news conference after the decision on Friday. Market participants will be looking for hints at whether the rate-cut cycle is ending.

What Our Economists Say:

“The central bank is likely to hold this week, but it’s telling that policy makers still see room for further easing. The guidance is likely to keep another cut on the table in the near term.”

–Scott Johnson, Bloomberg Economics, PREVIEW

The ruble lost nearly 5% against the U.S. dollar this quarter. It’s the third-worst performer among emerging-market currencies, weighed down by concerns of new sanctions over the poisoning of opposition figure Alexey Navalny and Russia’s continued support for Belarus’s embattled president. The coming U.S. election means tensions are unlikely to ease soon.

A “rate cut should not have a major negative impact on the ruble if it is accompanied by a statement which implies that the central bank adopted a wait-and-see mode,” said Rabobank strategist Piotr Matys, one of the four predicting a reduction.

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