© Reuters. Russian Rate Hike in Play After Ruble Finally Fires Up Inflation(Bloomberg) — Russia’s latest bout of currency weakness is doing more damage than just taking the wind out of the central bank’s monetary stimulus this year.
The Bank of Russia, which already paused its easing cycle in April, is starting to lay the ground for reversing course on interest rates as price pressures build. While a round of U.S. sanctions in April touched off an even bigger decline in the ruble than last month, the depreciation this time is combining with a worsening outlook for inflation to raise the prospect of Russia’s first hike in borrowing costs since 2014.
The ruble was among the four worst performers in emerging markets in August with a loss of more than 7 percent against the dollar. The central bank has estimated that each 10 percent decline in its value could add a percentage point to price growth. Data due as early as Wednesday will show inflation reached an annual 3.1 percent last month, the fastest in a year, according to the median of 13 forecasts in a Bloomberg survey.
“In April, some businesses could have refrained from passing on the ruble’s weakness onto consumers amid still-weak demand, and instead sacrificed part of their margin,” said Tatiana Evdokimova, chief economist for Russia at Nordea Bank. “But going forward, it will be hard to cut the margin further.”
Bank of Russia Governor Elvira Nabiullina said Tuesday that there were factors in favor of raising rates at a meeting next week, even though most evidence still pointed toward leaving borrowing costs unchanged. For now, all 13 economists polled by Bloomberg predict the benchmark will be kept at 7.25 percent on Sept. 14. Still, a discussion over more drastic measures may be heating up.
“We are seeing that inflation is returning to our target slightly faster than we were earlier forecasting,” Nabiullina said. That’s “primarily because of external factors, the exchange-rate dynamics.”
The difference from April is also that a moderation in food prices through the summer months helped mask the ruble’s inflationary fallout. The outlook for the rest of the year is far less favorable.
Adding to concern are plans to raise the value-added tax from Jan. 1, a move the Bank of Russia says may boost price growth by as much as 1.5 percentage points. The main impact is expected in the first quarter, when the central bank sees consumer-price growth temporarily exceeding its target of 4 percent. In July, annual inflation hit a high for 2018 even though it remains well below the goal.
Households’ inflation expectations for a year ahead, which the central bank calls a “pillar” of its rate decisions, rose in August to more than double the target. The share of Russians expecting the ruble to depreciate further is at the highest level since 2013, according to surveys conducted by inFOM on behalf of the central bank.
“Headline inflation is going to rise fast in the next few months,” said Tatiana Orlova, an economist at Emerginomics in London.“We have a pass-through from the weaker ruble and high global grain prices and an increase in local processed meat prices.”
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Source: Investing.com
