August 31, 2018 / 1:57 PM / 8 months ago

U.S. sanctions seen taking toll on Russian central bank policy - Reuters poll

MOSCOW (Reuters) - The Russian central bank will need to postpone a plan to cut rates due to new U.S. sanctions against Moscow seen taking toll on inflation and the rouble, a monthly Reuters poll of 20 analysts and economists showed on Friday.

FILE PHOTO - A Russian national flag flies over the Central Bank headquarters in Moscow, Russia, May 17, 2016. REUTERS/Sergei Karpukhin/File Photo

Russia’s economic outlook deteriorated after the rouble hit more than two-year lows against the dollar in August following Washington’s move to apply fresh sanctions against Moscow and a warning that it could extend them in the future.

The central bank, in charge of inflation and financial stability, is now seen holding the key interest rate unchanged at 7.25 percent by the end of the first half of 2019, according to the poll. Some respondents did not rule out a rate increase.

Before the recent bout of sanctions, which consumed around 8 percent of the rouble’s value in just one month, the central bank was expected to trim the key rate in the first quarter next year, if not by the end of 2018.

“The CBR will likely prefer to wait out the rouble weakness with an unchanged policy rate,” said Vladimir Osakovsky, chief economist at Bank of America Merrill Lynch in Moscow.

“But a potential spike in market volatility could warrant a protective rate hike and keep the finance ministry’s FX purchases suspended,” Osakovsky said, referring to daily dollar buying by the central bank on behalf of the finance ministry that was paused in August to ease pressure on the rouble.

The central bank, set for a rate meeting on Sept. 14, will keep assessing the situation until the last minute and the final decision will hinge on the circumstances on other emerging markets, said Kirill Tremasov, head of research at Loko-Invest.

Expectations of an imminent rate cut have also waned as the rouble weakness is seen filtering into consumer prices. This would threaten the central bank’s goal of keeping annual inflation at around 4 percent in the next few years.

Inflation is now likely to exceed the previously expected 3.8 percent by the end of this year, given the rouble weakness together with a planned increase in the value-added tax, said Dmitry Dolgin, an analyst with Gazprombank.

“Chances of the central bank rate cut this year are now close to zero,” he said.

Amid a lack of support from lower lending rates and the overall gloom related to sanctions, Russia’s gross domestic product is expected to grow 1.7 percent this year, down from 1.8 percent predicted by the previous monthly poll.

Expectations about the rouble’s future have also changed over the past month.

The rouble is now seen at 64.50 against the U.S. dollar in 12 months compared with 63.08 forecast by the previous poll.

Still, the revised forecast envisages the rouble’s strengthening from levels of 67.95 per greenback seen in afternoon trade on Friday RUBUTSTN=MCX.

Writing by Andrey Ostroukh; Editing by Mark Heinrich

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