Economists Split Over Russian Rate Decision for First Time This Year

After three decisions when forecasters were unanimous, a narrow majority that includes JPMorgan Chase & Co. and HSBC Holdings Plc expects the Bank of Russia to keep its key rate unchanged at 16% on Friday.

Economists are split over a Russian interest-rate decision for the first time this year, highlighting the tough choice facing the central bank as the country’s war in Ukraine continues to overheat the economy and stoke inflation.

After three decisions when forecasters were unanimous, a narrow majority that includes JPMorgan Chase & Co. and HSBC Holdings Plc now expects the Bank of Russia to keep its key rate unchanged at 16% on Friday.

The rest of the analysts surveyed by Bloomberg see an increase of 100 to 150 basis points. Economists at Goldman Sachs Group Inc. reversed their call for a hold, joining Barclays Plc and Bloomberg Economics in predicting a hike to 17%.

“Domestic demand shows no signs of cooling,” Goldman’s analysts including Clemens Grafe said in a report. “Inflationary pressure continues to be fueled by a large output gap stemming from last year’s loose fiscal and monetary policy.”

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.

Policymakers have said they will seriously consider raising the benchmark for the first time since December, a decision that may take on more weight as inflation expectations have started to rise again.

Still, it may be too soon for the 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.

What Bloomberg Economics Says...

“The Bank of Russia’s signaling in recent weeks has been inconclusive. The central bank’s forward guidance will be hawkish, with the board likely to state that policy will remain restrictive as long as it takes to push inflation down persistently. Our base case is for inflation to be around 5.7% by the end of 2024. A more front-loaded tightening may allow the bank to start cutting the key rate as soon as October and bring the rate back to around 15% by December — if credit growth comes down.”

Alex Isakov, Russia Economist

Governor Elvira Nabiullina has kept rates on hold for the last five months. But with government spending on the rise, her statements have turned more hawkish, as economic growth, local demand and price increases have consistently outpaced the central bank’s expectations.

At the same time, a persistent labor shortage has fueled a salary race, production has failed to keep pace with demand, and the government is facing its highest borrowing costs in nearly a decade.

Recent central bank comments indicate that rate-setters may be 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%.

Economic growth accelerated in April to 4.4% from 4.2% in March, according to government estimates.

The central bank may opt to toughen its rhetoric, while letting the current policy stand, Stanislav Murashov at Raiffeisenbank in Moscow wrote in a note. “This will give the central bank additional time to monitor the process of monetary policy transmission,” he said.

After a slowdown in March, inflation in Russia surged during April and May. 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 won’t have complete data on May inflation when policymakers convene this week, Finam’s Belenkaya said.

“To make a decision to hike, the Bank of Russia has to first come to the conclusion that the already achieved tightness will not be enough even if the rate is kept at the current level for a longer period,” she said in a note. “This conclusion is not yet obvious.”