Russia central bank prepares for $35 oil as economic recovery stays elusive

Russia central bank prepares for $35 oil as economic recovery stays elusive

MOSCOW - Reuters
Russia central bank prepares for $35 oil as economic recovery stays elusive

AFP photo

Russia’s Central Bank has drawn up a “risk scenario” under which oil prices will stay around $35 for the next three years, Governor Elvira Nabiullina said, an outcome that would severely dent Russia’s chances of making a robust economic recovery.

Nabiullina made the comments after the Central Bank left its main lending rate on hold at 11 percent, extending a pause in its easing cycle because of growing inflation risks.

The central bank has come under pressure to soften monetary policy to limit an economic slump, but inflation has declined more slowly than initially forecast and the ruble remains vulnerable due to renewed oil price weakness.

Russia’s economy is feeling the impact of Western sanctions over the crisis in Ukraine as well as weak commodity prices, which make up the bulk of the country’s exports.

“External conditions remain complicated, with persistent unfavorable trends,” Nabiullina told a news conference. “First of all, this is high volatility of the world markets.”

Nabiullina said while the bank believed the Russian economy was over the most severe stage of its slump, conditions were not yet in place for a resilient recovery.

The Central Bank sees the economy contracting by 0.5-1 percent in 2016 before growth of 0.0-1 percent in 2017.

It has now held rates since July after cutting them aggressively from 17 percent in the first half of the year, meaning that the cost of borrowing for Russian consumers and businesses remains high.

Nabiullina said the central bank would resume lowering its key rate as inflation slows in line with its forecast and should inflation risks recede.

Among inflation risks, Nabiullina cited monetary policy normalization by the United States Federal Reserve and a continued slowdown in Chinese economic growth.

The Fed is seen raising rates at its policy meeting next week, a move that could pressure emerging-market assets by making them relatively less attractive to international investors.

Nabiullina reiterated on Dec. 11 that she saw restrictions on certain Turkish food imports - introduced by President Vladimir Putin in retaliation for the downing of a Russian warplane near the  Syrian border - as having a limited impact on inflation in the coming months.

The ruble’s reaction to both the central bank rate decision and the comments by Nabiullina was muted. It was 0.8 percent weaker against the dollar by 1322 GMT, though its weakening was linked mainly to Brent crude prices hitting new multi-year lows below $39 a barrel.