At central banks from Canada to New Zealand, prices of a wide basket of goods help determine the direction of interest rates. For Russia, increasingly, only one price matters: oil's.
Energy exports, already the lifeblood of the nation's economy, may now be dictating monetary policy. The head of Russia's central bank, Elvira Nabiullina says she checks the price of oil several times a day. Last year's 46 percent plunge in crude prices is making it tougher for Russia to fulfill a plan to gradually introduce an inflation-targeting strategy this year with the aim of reducing price increases to 4 percent by 2017.
Nabiullina shocked everyone with a rate cutlast month, just six weeks after raising borrowing costs to 17 percent—in an emergency fashion—from 10.5 percent as falling oil prices sent the ruble into a tailspin. When she brought the key rate back down to 15 percent, inflation was quickening—the January reading came in at 15 percent—and the ruble was sliding. The difference: Oil prices seemed to have enjoyed a bit of a bounce.
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"Movements in oil prices will continue to determine how much space the central bank has to lower interest rates from emergency levels," Neil Shearing, chief emerging-markets economist at Capital Economics Ltd. in London, says in an email.
Oil and gas account for about two-thirds of exports and about half of budget revenue. The ruble exchange rate, which has depreciated 44 percent over the past 12 months, depends "directly" on energy prices, Nabiullina has said. That explains the recent focus of monetary policy on oil. Without a stable exchange rate, an inflation target would be difficult to achieve.
Crude inching higher will prompt the Russian central bank to cut rates to 12 percent by the end of this year and to 9 percent by end-2016, Shearing predicts.
"Given what's happening with the policy rate, it looks like they shifted away from inflation-targeting and they are targeting something different—in particular, growth," says Dmitri Petrov, an analyst at Nomura Holdings Inc. in London. "With this jumping from one target to another, we don't really know whether this will happen."
The central bank should clue in investors on what it's doing, said Gunter Deuber, head of central and eastern European research at Raiffeisen Bank International AG.
"It's puzzling that external communication is still very much focusing on inflation," Dauber said. He predicts that inflation will peak somewhere between 17 percent and 19 percent, slowing to 11 percent to 12 percent by year-end, and rates will fall to 12 percent or lower. "Given the price dynamics you would not expect any rate cuts."
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