Russia to continue rate pause for the longest time in 7 years

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Russia to continue rate pause for the longest time in 7 years

Russia is expected to continue its interest-rate pause for the longest time in more than seven years as the central bank remains firm about inflation risks at a time of significant government spending on the conflict in Ukraine.

The possibility of raising rates for the first time since the immediate aftermath of the invasion is likely to be on the agenda when policymakers meet on Friday. But only two of the 14 economists surveyed by Bloomberg expect a hike of a quarter percentage point, with the rest saying the benchmark will stay at 7.5% for the sixth straight time.

Inflation is nearing the end of an uninterrupted decline that started a year ago and brought it well below the central bank's goal of 4%. Although Governor Elvira Nabiullina has said there are serious labor shortages and the possibility posed to prices by surging budget expenditure, he can probably afford to wait to see inflation just beginning to show signs of acceleration.

While we think inflation troughed in April, sequential price growth has been weaker than we had thought and hence it will likely take into the late third quarter for inflation to exceed the target, Goldman Sachs Group Inc. economists including Clemens Grafe said in a statement. We therefore now forecast the hiking cycle to start in September rather than in June. Official borrowing costs haven't changed since the central bank's steep monetary easing cycle that more than reversed an emergency hike after the invasion of Ukraine more than 15 months ago.

The changes of policy over the past year echo the experience in 2015 - 2016 when the Bank of Russia paused for six meetings after unwinding the rate increases it delivered in response to a crash in oil prices and the first round of sanctions following the annexation of Crimea from Ukraine.

The central bank is unlikely to act for now, despite sounding hawkish. For three-and-a-half months, it has tended to wait until inflation's run rate exceeded its target for three-four months before raising rates. Alexander Isakov, a Russian economist, was the subject of one of Russia's most important news stories last week. The proof of inflation is starting to surface. In the weeks ending June 5th, price growth jumped from near zero to 0.2%. Inflation expectations for a year ahead, a crucial factor for policymakers, rose in May for the first time in three months.

Analysts at the Bank of Russia have warned that price pressures are on the rise, pointing to factors such as faster wage growth and worker shortages, as well as a revival in consumer lending.

The economic outlook has changed more positively, Nabiullina said after the last policy decision in late April that a rate hike would remain more likely. The tone may grow even more hawkish at this week's meeting, according to Raiffeisenbank analyst Stanislav Murashov and Grigory Chepkov, especially with budget spending on track to be higher than planned.

The rapid rise in inflation in the first days of summer may prompt the central bank to tighten its rhetoric, they said.

None Payrolls, prices, productivity and profits hold the answer to the puzzling US economy.