The Central Bank of Russia is likely to keep its policy interest rate unchanged in the near term, despite growing pressure from the government to ease policy amid slowing growth and above-target inflation, Capital Economics Emerging Markets Economist Liza Ermolenko said Wednesday.
Capital Economics noted that any prospect of interest rate cuts now depends on how long inflation takes to fall back. The firm forecasts that policymakers may wait until the second half of the year when the headline rate is likely to fall closer to the upper band the target range. The benchmark rate will likely be lowered by 25 basis points in the third quarter.
According to the economist, though the central bank is under increasing pressure from the government to ease policy in order to support the slowing economy, it is hesitant to act in view of January's pick-up in inflation.
The bank's latest statement shows that any move in rates in either direction remains unlikely for now, indicating that policymakers are in an awkward position as the economy has shifted from a sweet spot of record-low inflation and strong growth in the first half of last year to a tough spot of rising inflation and slowing growth in recent months, the economist noted.
The Central Bank of Russia at its latest rate-setting session kept the benchmark interest rate unchanged at 8.25 percent as expected, and retained the repo and depo rates, which are more relevant in determining overall monetary conditions, at 5.5 percent and 4.5 percent respectively.
Latest data showed that Russia's inflation climbed to 7.1 percent in January, and remained well above the central bank's 5-6 percent target, driven primarily by higher food and transportation costs. Core inflation, meanwhile, remained unchanged at 5.9 percent.
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