Bank of Rus­sia scraps eas­ing pledge, set­ting pol­icy adrift

The Pak Banker - - COMPANIES/BOSS -

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."

is another Nabi­ul­lina's

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