By Elena Fabrichnaya and Alexander Marrow
MOSCOW (Reuters) – The Russian central bank is expected to hold its key interest rate at 7.5% on Friday but may give a more hawkish signal to the market as inflationary risks become more pronounced, a Reuters poll showed on Monday.
Last year, the bank gradually reversed an emergency rate hike to 20% it implemented in late February after Moscow’s decision to send tens of thousands of troops into Ukraine, which led to increasingly wide-ranging Western sanctions being imposed on it in response.
The key rate has stayed at 7.5% since the last cut in September, with stubbornly high inflation stymieing the Bank of Russia’s efforts to soften monetary policy further.
All 25 analysts and economists polled by Reuters on Monday predicted that Russia would keep its benchmark rate unchanged again on Friday.
“So far, inflation dynamics do not call for a rate hike, but proinflationary risks are increasing,” said Mikhail Vasilyev, chief analyst at Sovcombank.
The three key proinflationary risks of a weaker rouble, a widening budget deficit and shortages in the labour market have all become more pronounced since December, Vasilyev added.
The rouble has lost almost 15% against the U.S. dollar since early December, while the central bank has warned that Russia’s partial mobilisation of troops for the conflict in Ukraine could stoke longer-term inflation due to a shrinking labour force.
“The signal could indeed be tightened, because inflation risks are still prevalent, as can be seen in still elevated inflation expectations and weekly CPI statistics,” said Olga Nikolaeva of ITinvest. “Budget expenditures are creating an additional serious risk.”
With Russia’s oil and gas revenues declining under the weight of price caps and embargoes, analysts expect Russia’s budget deficit to widen further than forecast. Such softer fiscal policy would require tighter monetary policy, the central bank has said.
The signal for tighter monetary policy is already embedded in prices of the government’s OFZ treasury bonds. Yields, which move inversely to bond prices, have been steadily rising since mid-October. Russia’s 10-year benchmark OFZ yield stood at 10.61% on Monday.
However, annual inflation’s likely drop in March to 2%-3% – as the base effect of last year’s price surge kicks in – may limit the central bank’s options to hike rates, said Alfa Bank Chief Economist Natalia Orlova.
Far above the central bank’s 4% target, inflation is down from 20-year highs reached shortly after the nearly year-long conflict in Ukraine began. Annual inflation came in at 11.9% in 2022 and is now running at around 11.5%.
“Even if there are inflation risks, they are hypothetical for now, and actual inflation dynamics show a strong slowdown in price growth,” Orlova said.
The central bank’s First Deputy Governor Ksenia Yudaeva last week said the situation in the economy and on financial and energy markets, may lead the bank to revise its forecast for the average key rate this year.
(Reporting by Elena Fabrichnaya and Alexander Marrow; Editing by Hugh Lawson)