Russia’s Hawkish Hold Leaves Rate Hike on Table as Economy Booms

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(Bloomberg) -- Russia’s central bank extended its interest-rate pause but signaled that monetary tightening is still an option, as the country’s war in Ukraine continues to overheat the economy and stoke inflation.

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For the fourth meeting in a row, policymakers kept their benchmark at 16% on Friday. A narrow majority of economists surveyed by Bloomberg had forecast a hold, while the rest expected a hike.

The Bank of Russia said in a statement that it “holds open the prospect of increasing the key rate at its upcoming meeting.” The ruble was little changed after the decision before slipping and trading 0.4% weaker against the dollar as of 5:07 p.m. in Moscow.

“Returning inflation to the target will require a significantly longer period of maintaining tight monetary conditions in the economy than it was forecast in April,” the central bank said. It now anticipates price growth will return to its 4% goal in 2025 and then “stabilize close” to that level.

Policymakers had signaled they were seriously considering what would have been their first rate increase this year. Local money markets have placed a 50% probability for a rate hike in June, and a 100% chance in July, according to Bloomberg Economics estimates.

With government spending on the rise, Governor Elvira Nabiullina has been turning more hawkish as economic growth, local demand and price increases have consistently outpaced the central bank’s expectations. Still, it might have been too soon for the central bank to know if the currently high key rate isn’t filtering through to the economy, according to Olga Belenkaya, an economist at Finam in Moscow.

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“Despite mixed signaling in the run-up, the board decided the data doesn’t warrant an increase in the rate just yet. They also maintained a hawkish forward guidance, and that, combined with April’s hot labor market data, means that July’s decision will be a close call as well.”

Alex Isakov, Russia economist. Click here to read more.

While a persistent labor shortage is fueling a salary race, production has failed to keep pace with demand. Additionally, unseasonably cold weather in May has caused some crops to perish, meaning “the risk of a new food price shock has risen,” according to Tatiana Orlova of Oxford Economics, who expected a hike to 17% on Friday.

Still, recent central bank comments indicated that rate setters were willing to wait.

Slowing inflation requires a cooldown in demand, which means maintaining tight monetary conditions for a long time, the central bank said in a May report. Additional tightening may be needed “if disinflation does not resume in the coming months,” it said.

There are hints of easing consumer activity. Retail sales growth declined to 8.3% in April after reaching 11.1% in March in annual terms. However, the labor shortage grew even more acute with the unemployment rate falling to a new historical low of 2.6%.

What’s more, inflation in Russia surged during the past two months after a slowdown in March. Price growth accelerated for four weeks in a row and exceeds 8% annually, more than double the central bank’s target of 4%.

The spike in price growth could intensify an uptick in inflation expectations — one of the key indicators watched by rate setters. That gauge increased for the first time this year in May to 11.7%.

“The central bank decided to pause before taking more informed steps in July,” said Dmitry Polevoy, investment director at the Moscow-based Astra Asset Management. “This is logical in light of the latest ambiguous macro data.”

(Updates with analyst comment in final paragraph)

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