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Russia Holds Rate as Attacks by Ukraine Spur Inflation Risks

(Bloomberg) -- Russia’s central bank held interest rates unchanged on Friday, as it navigates inflation risks that now include attacks on regions bordering Ukraine.

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For the second meeting in a row, policymakers left their key rate at 16%, in line with the unanimous forecasts of economists surveyed by Bloomberg. The Bank of Russia gave no guidance on the likely direction of its next move, saying “tight monetary conditions will be maintained in the economy for a long period.”

Speaking after the decision in Moscow, Governor Elvira Nabiullina reiterated that the start of monetary easing is more likely in the second half of the year, once the central bank sees convincing evidence that inflation is slowing down.

Regions including Belgorod and Kursk have faced drone and missile attacks in recent weeks as Ukraine mounts a campaign targeting infrastructure and industrial facilities including oil installations to try to undermine Russia’s war machine.

Ahead of this month’s election, in which President Vladimir Putin claimed a landslide victory to secure a fifth term in power, the government was very active with efforts to curb skyrocketing food prices, a major complaint among the electorate.

Now, traditionally affordable staples such as chicken may grow pricier as attacks continue on the Belgorod region, a major agricultural area that accounts for 14% of all of Russia’s livestock and poultry production.

Moreover, at least nine major refineries have been successfully attacked this year, currently taking offline 11% of the country’s total capacity by some estimates. Although there’s been little movement in the cost of fuel at the pump within Russia, the flurry of attacks prompted a surge in prices for gasoline and diesel on the St. Petersburg International Mercantile Exchange.

Read more: Ukraine’s Drone Strikes on Russian Oil Mark New Phase in War

What Bloomberg Economics Says...

“We interpret the central bank’s statements as evidence that it no longer considers rate hikes as necessary — something that was among its options in February. If inflation reports show a further slowdown, we think this cycle’s first policy rate cut could arrive as soon as April to June.”

—Alexander Isakov, Russia economist. For more, click here

Nabiullina has continued to signal the central bank aims to keep the cost of borrowing at its highest level since the early days of the war in Ukraine for a prolonged period. Annual price growth has stalled at over 7%, leaving it at almost twice the 4% target.

The central bank’s outlook depends on the likely changes to fiscal policy in connection with goals laid out by Putin ahead of the election and their exact impact on inflation and the economy, Nabiullina said.

“Over the medium term, the balance of inflation risks is still tilted to the upside,” the central bank said in a statement accompanying the decision on Friday.

While the briefing may have appeared more dovish, it doesn’t mean policymakers are ready to start cutting the rate quicker, according to Dmitry Polevoy, investment director at Astra Asset Management. The central bank forecast for the rate until the end of the year is in the broad range of 9-9.5% to 14%, so there was no need to change the overall tone, he said.

Meanwhile inflation expectations among households dropped in March for the third straight month to 11.5% from their December peak of 14.2%. That indicator has traditionally served as one of the main barometers of price pressure for policymakers.

Read more: Attacks Across Russia Border Bring Home Costs of Putin’s War

“The rhetoric remains tough, and there are no hints of a start to easing monetary policy yet,” said Natalia Milchakova, an analyst at Freedom Finance. “We expect that the central bank will start to reduce the rate no earlier than September.”

(Updates with analyst comment in 11th paragraph.)

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