Russia Unexpectedly Hikes Rate Before Quarter Loaded With Risks

Russia’s central bank unexpectedly increased borrowing costs for the second time this year and signaled it may soon act again as inflation accelerates amid a tax hike and possible new U.S. sanctions.

“The central bank will consider further key rate increases based on inflation and economic dynamics relative to forecasts, as well as risks posed by external conditions and the reaction of financial markets,” the central bank said in a statement. It also warned oil prices could fall further as supply outstrips demand next year.

Russia’s central bank unexpectedly increased borrowing costs for the second time this year and signaled it may soon act again as inflation accelerates amid a tax hike and possible new U.S. sanctions.

“The central bank will consider further key rate increases based on inflation and economic dynamics relative to forecasts, as well as risks posed by external conditions and the reaction of financial markets,” the central bank said in a statement. It also warned oil prices could fall further as supply outstrips demand next year.

The bank raised its key interest rate a quarter-point to 7.75 percent. The majority of the 42 economists surveyed by Bloomberg had predicted a hold, with only 16 forecasting the hike. The ruble declined, as any impact of the tightening was offset by an announcement the central bank will resume billions of dollars in foreign currency purchases from Jan. 15.

Governor Elvira Nabiullina will hold a news conference at 3 p.m. in Moscow.

Spike Ahead

Russian inflation will accelerate further next year on tax hike

The move will give extra protection to the ruble as it heads into a potentially tumultuous quarter after a more than 13 percent plunge this year. Inflation is edging closer to the central bank’s 4 percent target and could spike next quarter after a value-added tax increase kicks in. Discussion over sanctions for Russia’s alleged interference in U.S. elections is expected to resume again after a delay this year.

The rate hike is aimed at limiting the possible negative effect on the market from restarting the FX purchases,” said Tatiana Evdokimova, chief economist for Russia at Nordea Bank.“Future moves by the central bank will be highly dependent on how the VAT increase effects inflation expectations.”

Annual inflation accelerated for a sixth month to 3.9 percent as of December 10, the central bank said in today’s statement. It may reach 5.2 percent by the end of March, according to a Bloomberg survey.

What Our Economists Say…

“Caution trumped confidence as the Bank of Russia raised interest rates. We expect the central bank to stop here but to approach the next few meetings much as it did this one — with its finger on the trigger.”

–Scott Johnson, Bloomberg Economics

The central bank typically buys foreign currency to build up reserves when oil prices are above $40 a barrel. Purchases were suspended in August to stem a slide in the ruble as concern mounted over sanctions. The recent plunge in global oil prices means the central bank will only have to buy about $201 million a day, below the 2018 average, to its meet targets, according to Bloomberg Economics.

The ruble traded 0.4 percent weaker at 66.49 per dollar. The yield on Russia’s 10-year local-currency bonds was unchanged at 8.7 percent.

The resumption of FX purchases “will contain any strengthening of the ruble,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “Given the current uncertainty in external factors and the central bank’s conservatism, at least one hike in 2019 is highly likely.”

Bloomberg

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Ed Moya

Ed Moya

Senior Market Analyst, The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.
Ed Moya