The Central Bank of Russia officially made a move in response to falling oil prices and a weaker ruble: it kept interest rates on hold at 11%. This was the first time it didn’t cut rates this year.
“Today’s decision… clearly reflects policymakers’ concerns about the recent weakness of the ruble and the impact this will have on inflation,” Capital Economics’ emerging markets economist Liza Ermolenko wrote in a note to clients.
However, she added that the rest of the bank’s statement was “surprisingly balanced” and did not rule out further cuts in the medium-term.
“[Future cuts] are likely to be contingent on two factors: a stabilisation of the ruble and firm signs that inflation is easing,” writes Ermolenko. “Once the effects of last year’s ruble crisis begin to unwind, inflation should start to ease early next year. Accordingly, while we expect the CBR to leave rates on hold over the coming months, a few modest rate cuts to the benchmark one-week repo rate are possible in 2016.”
Notably, this change in strategy does not come as a surprise.
Although the bank slashed rates for the fifth time in 2015 in early August, the cut was less than expected amid a weaker ruble and lower oil prices. Additionally, at the time, the bank took out the phrase “ready to continue cutting,” signalling a potential shift in the central bank’s strategy.
“Policymakers are no longer committing themselves to lowering interest rates further,” Ermolenko previously told Bloomberg. “Future interest-rate decisions are likely to be determined by moves in the currency.”
Still, that doesn’t mean that interrupting the rate-cutting agenda was an easy choice for the bank, as it is keen to keep cutting rates because of Russia’s anemic economy.
“On the one hand, the recession in the economy and extremely tight credit conditions argue for a rate cut,” Ermolenko previously told Bloomberg. “But on the other hand, easing policy at the time when the ruble is weakening sharply could cause it to fall even further, creating risks for inflation and financial stability.”
The ruble has dropped by approximately 20% against the dollar since the beginning of July. The currency is currently trading around a low of 68.2 per dollar.
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