Home / News / World /  Russia holds rates first time this year after rouble plunge

Russia’s central bank held interest rates for the first time this year after the rouble’s crash deepened with slumping oil prices, arresting an easing cycle that’s so far failed to reverse the nation’s first recession since 2009.

The one-week auction rate was kept at 11%, according to a statement on Friday. That matched the forecasts of all but three of the 36 economists surveyed by Bloomberg. The rest predicted a reduction.

The severity of the rouble’s plunge is taking precedence over the intensifying recession for the central bank, which also has to contend with possible monetary tightening by the US Federal Reserve and the global fallout from China’s economic downturn. The depreciation since the previous meeting in July triggered a run-up in inflation, which is almost fourfold the central bank’s mid-term target.

“The depreciated rouble will continue to put pressure on prices in the next few months," the central bank said in the statement. “However, the relatively tough monetary conditions and slack domestic demand will drag down annual inflation."

The rouble is the world’s worst performer in the past 12 months against the dollar, with a 45% drop. Its three-month implied volatility, a measure of exchange-rate swings, is the highest globally at about 26%, according to data compiled by Bloomberg. The rouble traded 0.3% weaker at 67.8680 versus the dollar after the rate decision.

The Bank of Russia has almost rolled back last year’s emergency rate increase with five cuts since January, shaving 6 percentage points off borrowing costs. The economy of the world’s biggest energy exporter shrank 4.6% in the second quarter from a year earlier after a 2.2% drop in the first three months.

“A pause in easing policy would mean that the central bank sees risks for its previous forecast for inflation or for financial stability, which are outweighing concerns over economic growth" Dmitry Polevoy, an economist at ING Groep NV, said before the decision.

Turmoil on financial and commodities markets has forced the government to review its forecast for this year’s contraction just two weeks after it was downgraded to 3.3%. The cabinet also shortened its fiscal-planning horizon to one year from three for 2016 and plans to suspend the so-called budget rule, which capped public spending based on average long-term oil prices.

While policymakers plan to reach their 4% inflation target in the medium term, annual consumer-price growth accelerated for a second month in August to 15.8% after reaching this year’s low of 15.3% in June. The current rate of price growth is “still assessed as very high", according to the central bank’s last report on inflationary expectations.

“The rouble’s weakness may have its inflationary outcome and this risk may appear to be in focus," Dmitry Savchenko, an analyst at Nordea Bank AB in Moscow, said in a note to clients on Thursday. “However, the concern about economic growth may be reflected in a dovish statement. Bloomberg

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