Bank of Russia dashes hopes for quick rate cuts

Russia´s central bank loosened policy in response to a slowdown in the rate of price rises in the country, lower inflation expectations and unstable economic activity, but issued a hawkish statement which took some investors by surprise.

Bank of Russia lowered its benchmark one-week repurchase rate by 50 basis points to 10.0%, as expected by the majority of analysts.

However, in their post-meeting statement rate-setters in Moscow said that interest rates were likely to remain on hold for the rest of the year.

"For the trend towards sustainable decline in inflation to strengthen, according to the Bank of Russia’s estimates, the current value of the key rate needs to be maintained till end-2016 with its further possible cuts in 2017 Q1-Q2," the statement read.

That stood in sharp contrast to forecasts from the likes of Capital Economics, whih had anticipated that the Central Bank of Russia would slash rates twice more during the remainder of 2016, in 50 basis point installments.

BoR projected CPI inflation would slow to 4.5% in September 2017 and 4.0% by the end of that same year.

The monetary authority did note that market players appeared to be forecasting a quicker pace of interest rate reductions, but that their end-2017 CPI forecasts are for inflation above the central bank´s target of 4.0%.

In September 2016 CPI had slowed to a 6.6% pace from 7.2% in July.

A recent decline in prices was "specifically" the result of strength in the the country´s currency, the ruble, with the outlook for good harvests expected to contribute to further drops, but non-food prices were only falling reluctantly, the monetary authority pointed out.

"The hawkish tone of the MPC’s communication appears to be at least in part aimed at dampening expectations that have arisen in the markets for substantial falls interest rates," Capital Economics´s Liza Ermolenko said in a research report sent to clients.

Sustained improvement in economic growth required structural improvements. BoR indicated.

Despite the announcement, as of 1306 BST the US dollar was 0.41% up on the Russian ruble.