Forward guidance fails to solve the enigma of Russia interest rates

Russia’s central bank has been trying for months to help the market understand its next moves, but the message isn’t getting through.Telegraphing its policy intentions for the third straight time, Governor Elvira Nabiullina said on Monday that the central bank will discuss reductions of 25 and 50 basis points in its 9.25% benchmark rate when it reviews borrowing costs on June 16, the same choices it considered in April.But instead of giving the markets a better read on its thinking, the last two attempts didn’t go well. After a stretch of 10 meetings when the consensus correctly predicted every move, most analysts guessed wrong in March and April, the first time since the Bank of Russia introduced its new key rate that two straight decisions came as a surprise. Despite Nabiullina’s strong hint, policy makers are still heading for a cliffhanger meeting, according to Piotr Matys, an emerging-market currency strategist at Rabobank in London.April “was a close call and it will be the same on this occasion,” said Matys, who was in a small minority that correctly predicted the last move.Just narrowing the policy choices hasn’t given most economists enough clues to follow along. The central bank was more convincing when it simply ruled out any rate changes last September and held true to its pledge the rest of the year, despite a much faster slowdown in inflation than it had anticipated. If price growth was below policy makers’ 4% goal last month, they may opt for a bigger cut, according to Matys.“Our decision will be made on the basis of a traditional analysis of inflation and inflation expectations, the situation in the economy, unemployment,” Nabiullina said. Policy makers favor a “cautious” approach to monetary easing, she told lawmakers earlier on Monday.Data due Tuesday or Wednesday will show that annual inflation was straight on target at 4% in May, easing for an 11th straight month, compared with 4.1% in April, according to the median of 20 estimates in a Bloomberg survey. Inflation is currently 4.1% from a year earlier, according to Nabiullina.Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki, isn’t waiting for the final reading, seeing “a tilt toward a more dovish stance” in Nabiullina’s mention of both options and a higher probability of a decrease of half a percentage point.“The Bank of Russia aims to improve its communication to adjust market expectations,” Miklashevsky said by email. “There is a clear room for the central bank’s dovishness.”Russian rate setters aren’t alone in trying and failing to guide markets on where its policy is likely headed. Recent attempts by global central banks at telling the public how interest rates will evolve in the future have arguably caused more confusion than clarity when shifts in the economy forced officials to change their plans.Among the 15 economists surveyed before Nabiullina’s remarks on Monday, most predicted a cut of 25 basis points. Two forecast no change and the remaining four saw a decrease of 50 basis points. Forward-rate agreements signal 84 basis points of decreases in borrowing costs over the next three months.“One reason why markets may still not fully buy the central bank’s guidance is that Russian monetary policy also depends on the external environment” over which it has no control, said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “These kind of external political risks can force the bank to do things it did not plan and make it harder to anchor expectations.”