Bank of Russia clings to caution but stops short of hawkish bias

Bloomberg

Governor Elvira Nabiullina really means it when she says the Bank of Russia will follow no predetermined course on rates.
Its outlook will allow for pauses as well as cuts of 25 to 50 basis points, depending on forecasts and the situation with inflation and the economy, Nabiullina told reporters in Moscow. The governor spoke after the central bank reduced its benchmark to 8.5 percent from 9 percent, in line with most forecasts, and said further easing was “possible” during the next two quarters.
“We are at the very start of the road to price stability,” Nabiullina said. “The task of entrenching inflation near the target is still ahead. We have to reduce and anchor inflation expectations, increase trust in central bank policy. In these conditions, we’ll attach greater significance to pro-inflationary risks than factors
acting in the opposite direction.”
The central bank is giving itself plenty of room to maneuver even with inflation at a record low. While consumer-price growth decelerated to within its target of “near or around” 4 percent, and inflation expectations fell to the lowest ever, the Bank of Russia is taking nothing for granted.
“All in all, the central bank prefers a cautious — not hawkish — bias,” said Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow. “The story is about a link between CPI and expectations. Given that they have been adaptive, the longer the CPI undershoot, the lower expectations will be and the easier it will be for the central bank to cut.”

Catching Up
The central bank had some catching up to do after a summer surge in food costs and geopolitical tensions forced a pause in its easing cycle in July. But despite the historic deceleration in inflation, which brought it to less than a fifth its level two years ago, the Bank of Russia is warning that expectations aren’t yet anchored at a low level, while the contribution of volatile fruit and vegetable prices can become more pronounced as inflation slows.
Although annual inflation has swung between 4.4 percent in June to 3.3 percent in August, the central bank considers those readings to be consistent with its goal. Nabiullina said the key rate is likely to reach its nominal equilibrium level of 6.5-7 percent only in 2019, with the central bank taking a “smooth and gradual” approach to easing policy. Policy makers might pause at their next meeting in October, according to Bank Saint-Petersburg PJSC and BCS
Financial Group.

Rate ‘Pillar’
Households’ inflation expectations for a year ahead, which the central bank calls a “pillar” of rate decisions, fell to 9.5 percent in August. On an annual basis, price growth may remain at its current level of 3.2 percent until the end of the year, Finance Minister Anton Siluanov said. The central bank is less upbeat, seeing it at 3.5-3.8 percent at end-2017, according to Nabiullina.
The governor used her briefing to clarify how the central bank’s stance may change now that inflation is stabilizing near the target.
Seeking to preserve as much flexibility as possible, Nabiullina said only those deviations in price growth that are significant and sustainable over time would trigger a response.
Inflation may fluctuate above or below 4 percent, she said, adding that the Bank of Russia decided against defining a specific target corridor. While expectations aren’t likely to fall to 4 percent, the central bank wants to see less volatility in the outlook of households alongside its sustained decline, according to Nabiullina.
Policy makers face less urgency to deliver stimulus after the economy grew last quarter at the fastest pace since 2013. The central bank improved its forecast for gross domestic product to grow 1.7-2.2 percent in 2017, compared with a gain of 1.3-1.8 percent it projected earlier.
The ruble fluctuated after the rate decision, briefly erasing its decline, before trading 0.4 percent weaker at 57.735 against the dollar as of 5:16 p.m. in Moscow. The yield on Russian 10-year ruble bonds fell four basis points to 7.54 percent.
“Cautious cuts accompanied by a vigilant attitude toward medium-term risks should be beneficial for both the currency and the long end of the yield curve,” said Inan Demir, an economist at Nomura International Plc.