U-turn before Russian blackout shows interest rate-cut cycle beckons

Bank of Russia Governor Elvira Nabiullina wouldn’t let the final day before a self-imposed communication blackout go to waste.In a speech just before the weeklong quiet period, Nabiullina said on Thursday that Russia’s central bank may consider what would be a second consecutive reduction in its key interest rate at a meeting next week. With annual inflation running at almost exactly its 4% target, “a discussion may be held on lowering the rate by between 25 and 50 basis points,” Nabiullina said.“What a U-turn” for Nabiullina, said Piotr Matys, an emerging-market currency strategist at Rabobank in London. “Such explicit comments about the potential size of the next cut imply growing confidence at the central bank that the official inflation target will be met. Another reason could be to slow down the pace of the rouble’s appreciation by signaling that the substantial interest rate differential may narrow faster than previously assumed.”After expressing doubts last month that an easing cycle will get under way, Nabiullina is now telegraphing that continuous cuts may be imminent after all.It’s the second straight month that the central bank is tweaking its stance. The head of the monetary-policy department, who reports directly to the governor, said before a meeting in March that reductions of a quarter or a half percentage point were to be under consideration. Days later, policy makers ended a six-month pause, reducing the benchmark from 10% to 9.75% and breaking with February’s guidance that questioned if any room remained for monetary loosening in the first half.The central bank will lower the key rate with another quarter-point reduction at its meeting on April 28, according to most of the 26 economists surveyed by Bloomberg. Forward-rate agreements signal 81 basis points of decreases in borrowing costs over the next three months.Bonds rallied on Thursday after Nabiullina’s comments, with the yield on Russian 10-year rouble notes falling to the lowest in more than three years. It declined further yesterday to 7.76%, losing eight basis points in Moscow. The rouble traded 0.2% weaker against the dollar.“The faster deceleration in inflation is opening up room for us to cut the key rate already in April,” Nabiullina said at the Finance Ministry’s meeting in Moscow. “The economic situation now generally looks reassuring.”The Bank of Russia said after its March 24 decision that it saw “the possibility of cutting the key rate gradually” in the next two quarters. At a news conference after the meeting, Nabiullina said a sequence of rate cuts may not be uninterrupted, meaning its decrease didn’t necessarily mark the start of a new easing cycle.That approach may have changed as price growth nears the goal months ahead of schedule. Still, the median value of inflation expectations for a year ahead remains at almost triple the target, although it declined in March after a pickup in February.After moving in 50 basis-point steps for its prior three reductions, policy makers switched to a quarter percentage-point decrease in March for the first time since the key rate was introduced in September 2013. A week ago, Bank of Russia First Deputy Governor Ksenia Yudaeva said both smaller and bigger moves are possible.“Nabiullina and her colleagues finally made up their mind,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “After a long period of hesitation and cautious rhetoric, Russia’s central bankers seem to be happy with lowering rates over the next months. Prepare for easing!”