Russia Inflation Shock No Reason to Raise Rates, Nabiullina Says

by Olga TanasRyan Chilcote

A customer inspects the interior of a fridge freezer appliance inside a store in Saint Petersburg, Russia. Inflation in January jumped to 15 percent from a year earlier, the fastest pace in almost seven years, bringing it to the level of the benchmark interest rate. Photographer: Andrey Rudakov/Blooomberg

(Bloomberg) -- Russia’s central bank is unlikely to reverse last month’s surprise interest rate cut as inflation is set to slow after it accelerated to the fastest in almost seven years, according to Governor Elvira Nabiullina.
The Bank of Russia will stick to its pledge to avoid currency interventions unless the ruble’s swings threaten financial stability, Nabiullina, 51, said in an interview with Bloomberg Television in Moscow on Saturday. The governor, who said she checks oil prices several times a day, doesn’t see a reason for another “massive” ruble decline.
Almost two years into her tenure as the first woman to lead a Group of Eight central bank, Nabiullina is seeking a policy mix to address the world’s most volatile currency, a looming recession and the fastest inflation since 2008. She dismissed the idea that the unexpected easing in January, which followed an emergency rate increase six weeks earlier, may prompt another
turnaround after prices soared last month.

“We don’t see serious, significant factors that may lead to further inflation growth,” Nabiullina said. “That’s why there’s no reason to talk about the inevitability of a rate increase.”
Derivative traders and analysts are both predicting more easing. The three-month MosPrime rate, which large Moscow banks say they charge one another for ruble deposits, may drop 86 basis points, or 0.86 percentage point, in the next three months, forward-rate agreements tracked by Bloomberg show. That compares with last year’s high of 430 basis points of increases seen Dec. 9.
The Bank of Russia’s next move will be another reduction, according to 30 of 33 economists surveyed by Bloomberg, with 70 percent forecasting the move by the end of April.

Six Increases

The central bank had raised the benchmark rate six times last year, including a 6.5 percentage-point increase in December that was the biggest since 1998, to defend the ruble. It also shifted to a free-floating exchange rate ahead of schedule and spent about $88 billion of reserves on currency interventions last year to support the ruble.
Even so, President Vladimir Putin has scolded the regulator for not reacting to the crisis more quickly. Last month, the central bank replaced its head of monetary policy, selecting Dmitry Tulin to assume Ksenia Yudaeva’s role in the biggest leadership change since Nabiullina took charge in June 2013.

Policy Shift

Last month’s rate cut, the first since December 2011, marked a change of tack for the central bank. Only nine days before the Jan. 30 move, Nabiullina said any decrease will have to wait for a “sustainable trend toward a slowing of inflation.”
The rate cut -- to 15 percent from 17 percent -- triggered a wave of ruble selling that drove the currency down as much as 4 percent, adding to a selloff that’s left it about 48 percent weaker against the dollar in the past year, the world’s second-worst performance after Ukraine’s hryvnia.
While inflation has so far shown little sign of easing, Nabiullina said the central bank forecasts price growth will decelerate starting in the second quarter of the year as a result of the economic contraction and shrinking consumer demand.
If oil prices average near $50 a barrel, Russia’s gross domestic product will probably contract 3 percent to 4 percent this year, Nabiullina said. The regulator will issue its revised economic forecasts in March, she said.
The Economy Ministry predicts GDP will drop 3 percent in 2015 at such crude prices.

Inflation Cresting

“Inflation will peak in the second quarter, and it may be slightly above current levels,” Nabiullina said. “But these higher readings of inflation are the result of past factors” such as the ruble’s depreciation.
Inflation in January jumped to 15 percent from a year earlier, the fastest pace in almost seven years, bringing it to the level of the benchmark interest rate.
The central bank governor doesn’t see that as being enough reason alone to adjust borrowing costs. The policy rate should be compared with “future inflation and an inflation forecast,” not with current readings, she said. The effect of last year’s drivers behind surging prices is now ebbing, according to Nabiullina.
“We are seeing factors that will lead to slower inflation,” she said.

Ruble Rout

The ruble was battered by oil prices falling to the lowest since 2009, which compounded the effect of sanctions imposed by the U.S. and its allies over Russia’s role in the Ukrainian crisis. The country’s biggest currency crisis since 1998 erupted in December as foreign debt repayments by companies added to strains caused by limited access to international capital markets.
The ruble plunged as much as 20 percent after the Dec. 16 emergency rate increase, sinking to as low as 80.10 to the dollar. While it’s since stabilized, climbing about 3 percent last week, the ruble has the highest three-month implied volatility among currencies tracked by Bloomberg globally.
“We aren’t, of course, expecting such a large decrease in the ruble’s exchange rate,” Nabiullina said. “The ruble’s weakening was due to a massive drop in the price of oil and the need to repay foreign debts. In the future, we don’t expect such a degree, such a significant decline in oil prices. It’s just unlikely.”

Ruble Defense

The central bank won’t target the exchange rate and is ruling out any administrative restrictions on capital movement, according to Nabiullina.
Economists surveyed by Bloomberg see a 30 percent chance Russia will impose capital controls, a survey showed. Net outflows in the fourth quarter soared almost 10-fold from the previous three months to an estimated $72.9 billion, pushing last year’s total to $151.5 billion, according to the central bank. That compares with $61 billion in 2013.
Asked if the Bank of Russia is bracing for the fallout on the currency of geopolitical tensions over Ukraine, Nabiullina said the regulator is letting the market play out and is making no “special preparations” to counter any one factor that may affect the ruble.
“The ruble rate will be defined by market factors,” Nabiullina said. “We’ll be present on the currency market if there are movements that create risks for financial stability. Such factors exist, we live under conditions of this uncertainty.”