Russia warns of first rate increase in year
Russia's central bank warned it may tighten monetary policy if inflation risks intensify after leaving its benchmark interest rate unchanged for a fourth meeting.
The one-week auction rate will remain at 11 percent, the Bank of Russia said in a statement on Friday. Policy makers retracted their pledge to continue monetary easing, warning instead of a possible rate increase. They also acknowledged that risks have grown that inflation may "deviate" from their 4 percent target in late 2017.
"Should inflation risks amplify, the Bank of Russia can't rule out a tightening of its monetary policy," it said in the statement. "Against the backdrop of yet another oil price slump, monthly consumer-price growth rates stabilized at a high level, with a higher risk of accelerated inflation. The deterioration in global commodity markets will require a further adjustment of the Russian economy."
Swings in oil have whipsawed the ruble, leaving Russia at risk of a second year of recession after crude prices resumed their slump at the start of 2016. While consumer-price growth is set to decelerate this month to the slowest in more than a year, policy makers are opting to wait out turmoil in the oil market and the ruble after pointing to elevated inflation expectations.
Lower prices for Russia's main exports may result in a "more sizable" economic contraction than forecast previously for 2016 in the central bank's baseline scenario, it said. While the economy will probably return to growth next year, its pace of expansion will be "low," policy makers said.
"For the first time since pausing its monetary-policy easing cycle in September, the Bank of Russia explicitly said that the next move could be a hike rather than a cut," said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London. "The central bank may have to seriously consider the possibility of raising rates if the worst-case scenario" unfolds of Brent crude falling below a 2003 low and the ruble weakening beyond 100 versus the dollar in the near future.
While the ruble is down about 3 percent against the dollar this year, it's gained as oil advanced after Russia's energy minister said OPEC and other producers may meet. The Russian currency traded 0.7 percent stronger at 75.8600 against the dollar as of 1:50 p.m. in Moscow. Crude has pared its drop this year after earlier plunging to a 12-year low.
While the central bank is backed into a corner for now, the recession-hit economy needs relief after gross domestic product contracted 3.7 percent last year amid plunging investment and consumer demand.
The probability of the economy remaining in recession in the next year increased to 80 percent from 65 percent a month ago, according to analysts polled by Bloomberg. GDP will contract 0.7 percent this year, worse than last month's forecast for a 0.5 percent decline, the survey showed.
Annual consumer-price growth eased to 12.9 percent in December and will reach about 10 percent in January, policy makers said Friday. While acknowledging the risk that inflation will accelerate in the second quarter, the Bank of Russia said price growth will then resume its decline and slip below 7 percent as early as next January.
"The central bank made the right decision," said Natalia Orlova, chief economist at Alfa Bank in Moscow. "The hawkish undertones are a natural response to the recent ruble ' mini-crisis,' given that bouts of ruble weakening normally boost inflationary expectations."