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Waiting for Next Year as Nabiullina Pledge Chills Rate-cut Bets



By Anna Andrianova

Call it a master class in central bank communication.

Any doubt that Governor Elvira Nabiullina commands the market’s attention three years into her tenure has been dispelled by the reaction to her unprecedented pledge to leave Russia’s benchmark interest rate unchanged through year-end. As economists rewrote forecasts to show easing resuming sometime next year, rate-cut bets moved toward 2017. For the next decision, on Friday, all 38 analysts surveyed by Bloomberg say the rate will stay at 10 percent.

“The focus has shifted to next year,” said Yaroslav Lissovolik, chief economist at the Eurasian Development Bank. A cut in the first quarter isn’t guaranteed because it would take at least a few months for monetary-policy makers in Moscow to evaluate the effects of a potential U.S. rate increase, he said.

The Bank of Russia is wary of such external risks as it focuses on reaching a 4 percent inflation target by the end of 2017, having overshot its forecast for a fourth year in 2015 and with expectations for price growth remaining stubbornly elevated. That goal has driven the bank to stick to what it calls a “moderately tight” monetary stance even as the economy of the world’s largest energy exporter struggles to recover from a two-year recession, the longest since Vladimir Putin first became president.

Nabiullina said last month that the central bank is committed to maintaining rates because it wants to contain expectations for monetary easing that have overtaken its own outlook. Its message -- delivered after the one-week auction rate was lowered to 10 percent from 10.5 percent in this year’s second cut -- has been heard.

Reflecting investor confidence in higher borrowing costs, the ruble has gained 3.8 percent against the dollar since the September 16 rate decision, the third-best performance among 24 emerging-market currencies tracked by Bloomberg after Mexico’s peso and Brazil’s real.

Rate-Cut Bets

Derivatives traders scaled back bets for a rate cut in the next six months. Forward-rate agreements indicated 54 basis points of easing on Wednesday compared with 97 points the day before last month’s decision. Forward-rate agreements now indicate 9 basis points of easing in the next three months, down from last week’s high of 40 basis.

Economists now predict the key rate will remain at 10 percent through year-end, up from 9.5 percent they projected before last month’s cut. They see borrowing costs dropping to 8 percent next year, and have reduced inflation forecasts to 5.1 percent by end-2017 from 5.2 percent, though that still exceeds Nabiullina’s goal.

“The central bank’s hawkish message demonstrated that the regulator has zero tolerance for inflation surpassing its target,” Sberbank CIB analysts Tom Levinson and Vladimir Tsibanov said in an e-mailed note. “The central bank will likely end up holding off on cutting rates again until the second quarter of 2017.”

‘Clear Guidance’

Their timeline dovetails with the latest signals from the central bank. The Bank of Russia may even extend its commitment to leave rates unchanged if price growth decelerates too slowly, First Deputy Governor Ksenia Yudaeva said this month in an interview in Washington.

Inflation will ease to 6 percent in December from 6.4 percent in September, the slowest in 2 1/2 years, according to another Bloomberg survey. The central bank forecasts consumer- price growth falling to 5.5 percent to 6 percent at year-end.

Inflation expectations for next year rose 1.6 percentage points to 14.2 percent in September after a “sharp” decline in August, according the bank.

“We believe nothing has changed since the September meeting to affect the clear guidance of no rate cuts until the first half of 2017,” said Oleg Kouzmin, a former central bank adviser who’s now chief economist for Russia at Renaissance Capital in Moscow. “The central bank’s rhetoric is unlikely to change, at least until its next meeting.”