World Economy

Russia Warns of Possible Rate Hike

Russia Warns of Possible Rate HikeRussia Warns of Possible Rate Hike

Russia’s central bank has warned it may tighten monetary policy if inflation risks intensify after leaving its benchmark interest rate unchanged for a fourth meeting.

The one-week auction rate will remain at 11%, the Bank of Russia said in a statement. All 42 economists in a Bloomberg survey forecast no change.

Policymakers retracted their pledge to continue monetary easing, warning instead of a possible rate increase. They also acknowledged that risks have grown that inflation may “deviate” from their 4% target in late 2017.

“The Russian central bank’s rate decisions are now essentially a function of oil prices, which makes it rather difficult to forecast,” Goldman Sachs Group Inc. analysts Clemens Grafe and Andrew Matheny said in a report. “Given that the market is pricing oil to recover into the second half of 2016, we maintain that the central bank will have considerable space to cut. However, timing those cuts is essentially impossible given the volatility of oil prices.”

  Another Recession?

Swings in oil have whipsawed the ruble, leaving Russia at risk of a second year of recession after crude prices resumed their slump at the start of 2016. While consumer-price growth is set to decelerate during January to the slowest in more than a year, policymakers are opting to wait out turmoil in the oil market and the ruble after pointing to elevated inflation expectations.

“Should inflation risks amplify, the Bank of Russia can’t rule out a tightening of its monetary policy,” the monetary authority said in the statement. “Against the backdrop of yet another oil price slump, monthly consumer-price growth rates stabilized at a high level, with a higher risk of accelerated inflation. The deterioration in global commodity markets will require a further adjustment of the Russian economy.”

  Central Bank Status

Hours after the rate announcement, President Vladimir Putin met with Bank of Russia Governor Elvira Nabiullina, Finance Minister Anton Siluanov and a top Kremlin economic aide, Andrei Belousov. Calling it an exchange of opinions, Putin said that “nothing is changing” in the central bank’s status as an independent institution and urged work to be “coordinated one way or another”.

Lower prices for Russia’s main exports such as oil may result in a “more sizeable” economic contraction than forecast previously for 2016 in the central bank’s baseline scenario. While the economy will probably return to growth next year, its pace of expansion will be “low”, policymakers said.

“For the first time since pausing its monetary-policy easing cycle in September, the Bank of Russia explicitly said that the next move could be a hike rather than a cut,” said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London. “The central bank may have to seriously consider the possibility of raising rates if the worst-case scenario” unfolds of Brent crude falling below a 2003 low and the ruble weakening beyond 100 versus the dollar in the near future.

While the central bank is backed into a corner for now, the recession-hit economy needs relief after gross domestic product contracted 3.7% last year amid plunging investment and consumer demand. The probability of the economy remaining in recession in the next year increased to 80% from 65% a month ago, according to analysts polled by Bloomberg.