Bank Of Russia Seen Halting Rate Hikes As Wartime Election Looms

(Bloomberg) -- Russia's central bank will probably refrain from an interest-rate cut at its last meeting before March presidential elections, as it pivots from a cycle of monetary tightening that more than doubled the cost of money in the second half of last year.

A slowdown in inflation unexpectedly stalled last month, leaving it at almost twice the 4% target after a spike in fruit and vegetable prices. Though Vladimir Putin faces little challenge as he seeks a new term almost two years after Russia's invasion of Ukraine, a higher cost of living is a concern in a country where respondents in a recent poll named inflation second only to severe health problems among their biggest fears this year.

The outlook has led to the first unanimous Bloomberg survey in almost 10 months, with all economists predicting policymakers will leave their key rate at 16% on Friday. A separate poll showed a wide consensus that the benchmark won't fall until April at the earliest.

“Inflationary pressures are decreasing, but the target is still far away, and inflation expectations remain elevated,” said Sofya Donets, an economist at Renaissance Capital. 

As a pause looms after five straight rate hikes, the year's first meeting is ushering in changes in how the central bank communicates its decisions and rationale, as part of an effort make monetary policy more transparent.

For the first time, it will start to publish a summary of discussions held just ahead and during rate meetings, issuing it on the sixth working day after each decision. Other novelties include plans to release a separate comment on the central bank's medium-term economic outlook while shortening statements that accompany its rate announcements.

The Bank of Russia is set to unveil its latest forecasts on Friday, with Governor Elvira Nabiullina scheduled to hold a news conference at 3 p.m. in Moscow. After the last decision in December, she said policymakers were “close to the end” of their rate-hiking cycle” but vowed to keep a tight stance for as long as necessary to return inflation to its target.

What Bloomberg Economics Says...

“Russia's fruit and vegetable price spike in January means the central bank will need to refrain from a cut and keep the policy rate unchanged at least until April. Core inflation also accelerated due to the short supply of electronics and passenger cars.”

—Alexander Isakov, Russia economist. For more, click here

Following a run-up in consumer costs last year, Russian rates have returned to levels last seen in the first months after the February 2022 invasion of Ukraine. Nabiullina has warned she sees room for cuts no earlier than in the second half of 2024.

With the government spending heavily on the war effort, looser policies contributed more to inflation over the past three months than supply-side issues linked to restricted access to goods, according to Bloomberg Economics.

A weaker ruble also put strain on the price of products ranging from cars to eggs, adding to pressure from higher consumer demand stoked by growing wages and a boom in lending. 

Spillovers from the war will remain an obstacle to disinflation as acute labor shortages drive up salaries. Though price expectations among households dropped below 12% in February, they remain elevated by historical standards and present a “deterrent to the start of an easing cycle,” according to Donets.

Annual inflation accelerated slightly to 7.57% in the seven days to Feb. 12, from from 7.27%  a week earlier, the Economy Ministry estimates. 

A rate cut before June is possible only if inflation proves to be in check and domestic demand slows, said Dmitry Polevoy, investment director at Astra Asset Management. When it comes to the central bank's decision this week, “we do not expect it will turn its neutral signal to a more dovish one,” he said.

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