Russia Rate Cut in Question as Refinery Attacks Raise Fuel Costs

eef{s1d04d2ilr2yygqqi0}x_media_dl_1.png Bank of Russia

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(Bloomberg) — Russia may halt or slow its cycle of interest-rate cuts this week as Ukrainian attacks on refineries and a looming tax increase stoke inflation risks.

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Despite the economy struggling under the weight of lofty borrowing costs that the central bank only began cutting in June, Governor Elvira Nabiullina’s team has signaled growing caution before Friday’s policy meeting.

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In one telling exchange last week, Alexey Zabotkin, one of her deputies, promised only a “balanced decision” reflecting “all available information” when urged by lawmakers to deliver relief for the budget and businesses.

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That’s left economists split on the outcome of Friday’s meeting. About half predict a cut from the key rate’s current level of 17%, while the rest foresee no change. The central bank will announce its decision at 1:30 p.m. Moscow time, followed by a 3 p.m. briefing.

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“The recent acceleration in price growth and the rise in inflation expectations are limiting the space for rate cuts,” said Moscow-based Renaissance Capital’s chief economist, Andrei Melaschenko. He sees the central bank either standing pat or moving more cautiously with a half-point cut, following September’s full-point reduction.

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After briefly aligning with the Bank of Russia’s 4% goal, inflation has picked up once again. Part of the reason is the end of seasonal factors like the summer drop in fruit and vegetable costs, while the effect of a stronger ruble is also fading.

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More to blame, however, are fuel shortages. With the Kremlin showing little interest in negotiating an end to the war it started in 2022, Ukraine is stepping up strikes on energy infrastructure including refineries, oil pipelines and sea terminals. Gasoline prices jumped 3% in September and have risen another 2% this month. 

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The situation is worsening an already fragile inflation outlook. The central bank expects higher recycling fees for imported cars to squeeze the availability of such vehicles, and estimates that a plan to lift value-added tax to 22% from 20% in 2026 — to finance ballooning defense outlays — will add 0.6-0.8 percentage points to consumer-price gains.

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Such initiatives risk undermining a pullback in households’ perceptions of future inflation, potentially reducing the scope for policy to be loosened.

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“In an environment where several, temporary pro-inflationary factors are overlapping, monetary policy must consider their cumulative impact on the process of lowering inflation expectations,” the central bank said this month. “The timing and room for rate cuts will depend on how strong that impact proves to be.”

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Inflation expectations held at 12.6% in October. 

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The central bank has said decisions must remain “calibrated” and “cautious.” To hit its inflation target by the end of next year, it reckons seasonally adjusted monthly numbers must stay close to 4% for an extended period.