Russia vows to hold rate steady after second cut

Russia’s central bank reduced borrowing costs after a three-month pause and said its key interest rate will remain on hold for the rest of the year to keep a lid on prices before easing can resume again.

The one-week auction rate was lowered to 10 per cent from 10.5 per cent, according to a statement yesterday. Thirty-seven of 42 economists surveyed by Bloomberg predicted the move, while five saw no change.

“The current key rate needs to be maintained until end-2016 with a possibility to cut” in the first or second quarters of 2017, the central bank said in the statement. “The risks of failure to deliver inflation at the 4 per cent target in 2017 persist mainly due to the inertia of inflation expectations and potential weaker household saving motives.”

Reputation on the line

The Bank of Russia has its reputation on the line as it looks to rein in inflation to 4 per cent by the end of 2017 after overshooting its price forecasts in 2015 for a fourth year. With a favourable base effect from last year’s spike dissipating, policymakers have warned that fiscal uncertainty and rising wages risk reigniting price growth.

“We can add a new phrase when commenting about the monetary policy in Russia: ‘hawkish easing,’” said Piotr Matys, a currency strategist at Rabobank in London.

“It’s not only about the outlook for inflation and the real economy, but we also see the risk of excessive capital inflows fuelled by an attractive rouble carry trade as the central bank is clearly reluctant to cut rates far more aggressively.”