Bank of Russia scraps easing pledge, setting policy adrift
The four words Russia's central bank didn't say have brought new intrigue to its monetary policy. By omitting the phrase from June that it will be "ready to continue cutting" borrowing costs as inflation decelerates further, Governor Elvira Nabiullina left economists searching for clues to the path of interest rates.
After a half-point cut to 11 percent on Friday extended the easing cycle that began in January, data due Tuesday or Wednesday will show inflation quickened in July to 15.8 percent from a year earlier, the first uptick in four months, according to a survey.
"The central bank doesn't want to promise any clear steps," Dmitry Polevoy, chief Russia economist at ING Bank Eurasia AO in Moscow, said by e-mail. A deepening recession and risks to inflation and the ruble are pulling the central bank in different directions, leaving policy up in the air.
With the currency under pressure, Renaissance Capital thinks a rate pause may come with the next decision in September, while Goldman Sachs Group Inc. says the statement on Friday was consistent with another four percentage points of decreases by the first quarter of 2016.
Any further deterioration in oil prices or flight to the dollar means rates may remain unchanged to year-end, according to Alfa Bank. Policy makers warned that "the balance of risks is shifting toward considerable economic cooling" and said faster price growth last month was temporary, caused by an increase in state-regulated utility tariffs.
The Bank of Russia estimates annual inflation was already at 15.8 percent on July 27, a level that Economy Minister Alexei Ulyukayev said would be reached by Aug. 1. Sluggish domestic demand and a "relatively tight" monetary policy will contain prices, according to the central bank. What went unsaid were threats to the ruble or foreign-currency purchases that drove it to the world's worst performance since May 13, when the interventions began.
While the central bank last week suspended the operations to rebuild reserves, the ruble resumed losses and ended down more than 3 percent on Friday, plunging to its weakest level since March. "Policy makers are no longer committing themselves to lowering interest rates further," Liza Ermolenko, an analyst at Londonbased Capital Economics Ltd., said by email.
"Future interest rate decisions are likely to be determined by moves in the currency."Forward-rate agreements are indicating 15 basis points of decreases in borrowing costs during the next three months, up three basis points from Thursday. The key rate will end the year at 9.5 percent, according to the median estimate of 26 economists in a Bloomberg survey.
Economic performance indicator flashing red on dashboard.
The nation's slump deepened in the second quarter as gross domestic product shrank 4.4 percent from a year earlier after a 2.2 percent drop in the first three months, according to the Economy Ministry. The central bank said it may worsen its forecast for a 3.2 percent contraction this year.
Russian manufacturing extended its slump in July, with the Purchasing Managers' Index falling to 48.3 in July and remaining below the 50 threshold that separates contraction from growth for an eighth consecutive month, according to a report released by Markit Economics on Monday.
The survey "highlighted a marked and accelerated increase in average prices paid for inputs" as inflation reached the fastest in three months, Markit said.
"The balance of risks will still be skewed toward an economic contraction, which will give the central bank enough grounds to cut further," said Eldar Vakhitov, an economist at BNP Paribas SA in London. "The economic slowdown is deeper but inflation is higher. So the overall intention is to cut less."
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