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Russian c.bank holds key rate at 7.5%
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Hike more likely than cut this year, says governor
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Global banking woes pose no direct threat to Russia -
governor
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Nabiullina suggests bank may raise neutral rate range
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This content was produced in Russia where the law
restricts
coverage of Russian military operations in Ukraine
(Adds quotes from press conference, bullets, Alfa Bank comment)
By Alexander Marrow and Elena Fabrichnaya
MOSCOW, March 17 (Reuters) - Russia's central bank held
its key interest rate at 7.5% on Friday, maintaining its hawkish
rhetoric as a widening budget deficit and labour shortages pose
inflationary risks, and said rate hikes were more likely than
cuts this year.
Last year, the bank gradually reversed an emergency rate hike to 20% made in late February following Russia's decision to send tens of thousands of troops into Ukraine and the imposition of Western sanctions in response. The main rate has stayed at 7.5% since the last cut in September.
Annual inflation, which spiked to over 20-year highs in
2022, slowed to 7.65% as of March 13 as last year's base effect
takes hold. The central bank said this would lead inflation to
temporarily fall below its 4% target in coming months.
"At the same time, sustained inflationary pressure will gradually increase from moderately low levels," it said in a statement.
"We continue to believe that the likelihood of a rate hike this year exceeds the likelihood of a cut," Governor Elvira Nabiullina said.
RISKS The Bank of Russia, which sees inflation returning to the 4% target in 2024 after ending 2023 at 5.0-7.0%, remains concerned about inflationary risks.
"Accelerating fiscal spending, deteriorating terms of foreign trade and the situation in the labour market continue to pose pro-inflation risks," the bank said. "The overall balance of inflation risks has remained essentially the same since the previous board meeting."
The bank's average rate range for this year is 7%-9%, above
the neutral range of 5%-6%, which it hopes to return to in 2025.
Nabiullina said three factors - fiscal policy, Russia's
risk premium and the level of risk-free foreign interest rates -
would significantly influence the bank's recalculation of the
neutral range in July.
"It is likely that these factors will lead to an
increase in our estimate of neutral rates," Nabiullina said.
Inflationary pressure, though elevated, is showing signs of
easing, with households' inflation expectations for the year
ahead dropping to 10.7% in March from 12.2% in February.
Alfa Bank chief economist Natalia Orlova said the bank
seemed to be disregarding that drop in inflation expectations.
"The impression is that the regulator for some reason is
not prepared to give up its hardline stance," Orlova said.
Inflationary risks, including Russia's ballooning budget deficit and deteriorating terms of foreign trade, are limiting room to ease the cost of borrowing and boost growth, as Moscow looks to avoid a second straight year of economic contraction.
Tinkoff Investments analysts expect the key rate to be around 8.5% at year-end.
The economy proved unexpectedly resilient in the face of tough Western sanctions last year, declining 2.1%, but a return to pre-conflict levels of prosperity may be far off as more government spending is directed towards the military. Nabiullina said global banking woes would have no direct impact on Russia, but that a worldwide slowdown would lower demand for its exports and might increase inflationary pressure. (Reporting by Elena Fabrichnaya and Alexander Marrow; additional reporting by Darya Korsunskaya, Jake Cordell and Maria Kiselyova Editing by Gareth Jones)
