Bank of Russia slashes key rate, signals more easing

Bloomberg

The Bank of Russia reduced interest rates for a second time this year and signalled more cuts to come, as inflation and economic growth slow.
The key rate was cut to 7.25 percent from 7.50 percent, according to a statement. The move was forecast by all but one of the 40 economists polled in a Bloomberg survey, with the other expecting the rate to remain unchanged.
“If the situation evolves in accordance with the baseline forecast, the Bank of Russia expects to lower the key rate at one of the next meetings and return to the neutral rate in the first half of 2020,” the statement said, referring to the central bank’s 6 percent-7 percent target.
But the bank warned that inflation risks remain, even as the rate is on track to return to its 4 percent goal.
“Fiscal policy could have a significant impact on inflation dynamics in the short and medium term.”
The central bank’s wording on the outlook for easing was essentially unchanged from a statement that accompanied the central bank’s return to monetary easing in June after inflationary and sanctions risks abated. One more cut would bring rates back to levels not seen since before international sanctions and an oil price slump sent Russia’s economy into a tailspin.
Inflation eased more than expected to 4.7 percent in June from a year ago after an early harvest helped prices for some vegetables.
Prices were unchanged from May for the first time in the history of observations.
The statement warned that increased spending aimed at boosting growth could push
up inflation towards the end of the year. Another risk to prices comes from a proposal to spend the liquid part of the national wealth fund, it said.
Russia’s economy expanded at a slower pace than forecast in the first half of the year, growing just 0.7 percent in six months.
Nabiullina said earlier this month that Russia needs a structural overhaul to jump start the economy and warned against quick fixes.
“Another cut could come as soon as September, but the guidance is noncommittal, and there are more reasons to pause than to press ahead.
We expect a delay in the next move until at least October,” said Scott Johnson, economist, Bloomberg Economics.
Alexey Zabotkin, who heads the monetary policy department at the central bank, said in an interview that smaller 25-basis point cuts will remain the preferred option for easing unless there is a big data surprise.
Russia’s high real interest rates have boosted bonds and the ruble this year, with the currency rallying the most in the world. The rate cut is unlikely to decrease that appeal as central banks turn more dovish in developed markets.
The ruble held onto a small gain after the announcement and bond yields stayed slightly higher. Derivatives traders pared their bets for rate cuts over the next three months, with forward-rate agreements now pointing to 25 basis points of easing compared with more than 30 before the decision.