‘Unacceptable’ inflation may end Russian rate pause

Bloomberg

The level of inflation Bank of Russia Governor Elvira Nabiullina just deemed ‘ unacceptable’ is looking better by the day.
So much so that its failure to accelerate in May could force the central bank’s hand to ease policy for the first time in almost a year when it reviews interest rates this week. Price growth was unchanged for a third month at 7.3 percent from a year earlier, the slowest since 2014, according to the median of 20 estimates in a survey. The Federal Statistics Service may report the data as early as Monday.
“Once the central bank assesses inflation’s downward trend as robust, we are likely to see some easing,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany.
While risks abound and policy makers focus on building their credibility after shifting to inflation targeting, a possible uptick in price growth forecast by the central bank is so far failing to materialise. The respite, combined with stabilizing oil and the ruble’s comeback this year, may tip the balance in favor of a rate cut even as inflation remains almost double the 4 percent goal.

Rate Outlook
As of late Friday, forward-rate agreements signaled 45 basis points of decreases in borrowing costs during the next three months, compared with 14 basis points of cuts seen before the central bank’s meeting in April. The ruble is this year’s second-best performer among its emerging-market peers with a gain of almost 12 percent against the dollar. The Russian currency was 0.3 percent weaker at 65.8175 versus the dollar as of 10:31 a.m. in Moscow.
Twelve of 25 economists in a survey predict the key rate will be cut to 10.5 percent from 11 percent, with the rest forecasting no change.
As the outlook improves for the recession-hit economy, shaking the central bank’s resolve won’t be easy. It’s alert to threats ranging from elevated inflation expectations and increases in nominal wages to lingering uncertainty over the budget.
“We have to take any risk into account in a way that fits into conservative policy, with everything being equal,” Igor Dmitriev, head of the monetary policy department at the Bank of Russia, said.

Too Much
Nabiullina warned in April that inflation was at risk of stalling at 6 percent to 7 percent, which she said was too high to revive economic growth and investment.
Policy makers overshot their target in 2015 for a fourth consecutive year and have previously conceded they risk missing next year’s goal after turmoil in the oil market and the ruble.
Economy Ministry forecasts show inflation will end this year at 6.5 percent and won’t reach 4 percent until 2019.
With consumer demand showing little sign of snapping out of its worst drop under President Vladimir Putin, the spare capacity created by the recession will help keep a lid on prices, according to Capital Economics Ltd.
“There’s more general weakening in the underlying price pressures,” said Liza Ermolenko, a London-based analyst at Capital Economics. “Spare capacity in the economy, coupled with weaker demand, should ensure that inflation will rise only a little bit over the next few months.”