Russia extends pause in monetary easing

Bloomberg

Russia extended its pause in monetary easing as the central bank struck a surprise hawkish tone and warned that it’s slowing a shift to looser policy because of fiscal plans unveiled by the government.
Policy makers in Moscow kept their key interest rate at 7.25 percent, according to a statement. The central bank said the balance of risks has become “pro-inflationary,” boosting its inflation forecast as a result of government measures such as a plan to raise value-added tax. Nomura International Plc called the decision a “hawkish hold.”
While monetary policy may still become neutral this year, the shift is more likely in 2019, Governor Elvira Nabiullina told reporters after the decision. Just one-quarter percentage point separates the benchmark from a range deemed “neutral” — meaning a nominal key rate of 6 percent to 7 percent — a level that doesn’t contribute to a slowdown or acceleration of inflation relative to its target level of 4 percent.
“At the moment, we can’t make the remaining one-two steps in the key rate that would allow us to fully transition to neutral monetary conditions,” Nabiullina said.
With emerging markets in the grip of turmoil as the era of cheap money wanes, domestic concerns took precedence for the Bank of Russia, a day after the government unveiled plans to raise the VAT rate to 20 percent from 18 percent next year. Its hawkish turn followed decisions to raise rates by central bankers from Argentina to India as developing economies try to cope with higher US borrowing costs.
In Russia, the central bank warned that the hike in the tax could push price growth higher, bringing it to between 4 percent and 4.5 percent for a “short-term per- iod” in 2019. The planned revisions could contribute about a percentage point to inflation, policy makers said.
The looming change in the levy is the “main” risk to inflation and could have an impact even this year although it won’t be implemented until 2019, according to Nabiullina. That’s because a higher VAT rate could force adjustments in inflation expectations and lead to a pre-emptive repricing of goods, the governor said.
The ruble pared losses after the rate announcement before resuming declines.