(Bloomberg) -- Russia’s central bank kept interest rates unchanged and repeated guidance that it will consider a hike in the coming months even with inflation poised to fall to its target already in March.

In a statement accompanying the decision on Friday, the central bank said higher borrowing costs could soon be in play “if pro-inflation risks intensify,” almost word-for-word how it described policy plans in February. The benchmark rate was kept at 7.5% for a fourth straight meeting, in line with the forecasts of all economists surveyed by Bloomberg. 

“Accelerating fiscal spending, deteriorating terms of foreign trade and the situation in the labor market continue to pose pro-inflation risks,” the central bank said. “The overall balance of inflation risks has remained essentially the same since the previous board meeting.”

Governor Elvira Nabiullina has previously signaled that hikes are on the agenda should inflation come under pressure. But the prospect of higher rates is growing less immediate, even as threats to the economy from the war in Ukraine prompt policymakers to keep up their hawkish rhetoric.

Top of mind for Nabiullina is the enormous surge of budget expenditure and labor shortages as a result of the Kremlin’s call-up of men to fight in Ukraine. Official borrowing costs haven’t changed since the central bank delivered 12.5 percentage points of cuts in six steps to bring rates below their pre-war level. 

Path Ahead

While economists at banks including UBS Group AG, Barclays Plc and Morgan Stanley predict a hike already next quarter, a wider consensus is forming that the benchmark will stay at 7.5% or even fall in the months ahead. 

The Bank of Russia last raised rates in the immediate aftermath of the invasion in February 2022.

The challenges to the economy are playing out in the currency market. The ruble has lost nearly a third of its value against the dollar since last June in the second-worst performance in emerging markets after Argentina’s peso.

The Russian currency maintained losses after the decision on Friday and traded 0.3% weaker as of 2:43 p.m. in Moscow.

What Bloomberg Economics Says...

“February’s inflation data has provided the central bank a solid reason to hold interest rates steady. It also decreases the odds of a hike in April, as the Bank of Russia tends to wait for at least a quarter of inflation prints in excess of its target, before lifting rates.”

—Alexander Isakov, Russia economist. For more, click here

For now, price pressures probably don’t yet warrant any action from the central bank.

The statistical effect of a high base last year means annual inflation could already drop below the central bank’s 4% goal in March, according to Bloomberg Economics, before rebounding toward the end of the year.

Price-growth expectations for a year ahead, a key factor for policymakers, have dropped to the lowest since 2021. Weekly inflation has even turned negative and an annualized, seasonally adjusted measure of price growth is already below target.

Even so, economic risks from the war are keeping the central bank on alert.

The budget is in a deep deficit so far this year, though changes in the way the government taxes oil companies and a planned windfall levy will give it more cash to cover spending. Lower prices for Russian commodity exports and new restrictions on energy shipments have meanwhile brought the current-account surplus sharply lower.

“The central bank’s rhetoric hasn’t changed despite an easing of the inflationary background,” said Natalia Lavrova, chief economist at BCS Financial Group. “The disinflation of late February-early March was balanced out by increased pro-inflationary risks as a result of further destabilization in external conditions.”

(Updates with central bank comment in fourth paragraph, economist quote in final.)

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