Russia Cuts Refinancing Rate as Easing Cycle Draws to End, Inflation Looms

Russia’s central bank cut its main interest rates for the 13th time in a year to spur credit flows as the last so-called BRIC country still lowering borrowing costs nears the end of its easing cycle.

Bank Rossii reduced the refinancing rate a quarter point to 8 percent, effective April 30, it said on its Web site today. It also cut the repurchase rate charged on one- and seven-day central bank loans by the same amount to 7 percent. The decision was expected by 20 of 27 economists in a Bloomberg survey. The bank also cut the overnight deposit rate to 2.5 percent from 2.75 percent. It last cut rates a quarter-point on March 26.

The cuts are intended “primarily” to boost lending and make credit more “accessible,” the bank said in the statement. “The consumer price dynamics remain favorable” and the main indicators point to a “gradual trend towards the recovery of economic growth.” Still, the rebound is “unstable,” and “the necessity of supporting domestic demand remains.”

Brazil’s central bank yesterday became the first in Latin America to increase borrowing costs in more than a year, raising the Selic rate to 9.5 percent from 8.75 percent. China and India have increased reserve requirements for banks to avoid stoking unsustainable lending growth. Russia suffered a deeper recession than Brazil and is still trying to recover from last year’s 7.9 percent record economic contraction. That compares with China’s growth of about 9 percent and about 7.2 percent expansion in India.

‘Bottom of Cycle’

“We are probably at the bottom of the easing cycle” in Russia, said Piotr Matys, a London-based analyst at 4Cast Ltd., in a phone interview. “Maybe they can squeeze out another 25 basis-point cut. It will be too early to hike toward the end of the year. They should keep rates on hold in coming months and maybe start thinking about tightening in the first half of next year.”

The ruble gained 0.2 percent against the euro to trade at 38.7612 at 2:40 p.m. in Moscow. Against the dollar, the ruble rose 0.1 percent to 29.2412.

The regulator has reduced rates a total of 5 percentage points in 13 months while the government last year raised spending by 27.3 percent to drag the world’s largest energy supplier out of its worst recession by unlocking credit flows and rekindling demand. Finance Minister Alexei Kudrin on April 6 warned the stimulus may trigger faster inflation and bring an end to the cuts. The refinancing rate has been higher than the inflation rate since the fourth quarter.

Ruble

“When rates enter positive territory in real terms you do fewer stupid things, take fewer risks and this produces better- quality growth,” said Anton Stroutchenevski, an analyst with Troika Dialog in Moscow, before the announcement. Today’s cut “is an urgent necessity” to spur a recovery.

Australia, Norway, Israel and Vietnam have raised rates since the peak of the global crisis while the U.S. Federal Reserve has raised the rate charged to banks for direct loans, signaling an end to emergency measures to supply liquidity to financial institutions.

Russian economic growth slowed to a seasonally adjusted 0.6 percent last quarter from 1.7 percent in the previous period and 2 percent in the third quarter, according to the Economy Ministry.

Inflation, the slowest in 12 years last month at 6.5 percent, is set to accelerate and Bank Rossii has signaled it may start raising rates in the second half.

Lending

An increase in bank lending to households and businesses may also prompt the regulator to start tightening policy, economists said. Bank Rossii has indicated it may withdraw liquidity by forcing lenders to raise reserve requirements to pre-crisis levels.

Lending may grow 15 percent this year, bank Chairman Sergei Ignatiev said on April 9. The credit portfolio of Russian banks excluding the nation’s largest lender OAO Sberbank expanded about 1.5 percent in March, he said, adding the rise may be “a coincidence or a change of trend.”

Corporate loans were unchanged in March and retail lending rose 0.3 percent in the month, central bank data showed today.

That will help the economy grow 7 percent this year, compared with last year’s 7.9 percent contraction, marking the world’s biggest rebound, Bank of America Merrill Lynch said in an April 8 note.

‘Sharply Reduced’

The bank has also signaled it may do less to cap ruble gains and Ignatiev on April 9 said the regulator “sharply reduced” the extent to which it steers the currency.

A 70 percent surge in the past 12 months in Urals crude, Russia’s chief export blend, has supported a 13 percent appreciation in the ruble against the dollar. Policy makers may let the ruble strengthen more than the government wants, according to UBS AG and Commerzbank AG. Even after the currency’s gains, the ruble remains about 25 percent undervalued, Clemens Grafe, chief economist at UBS in Moscow, said in an April 20 interview.

The central bank may allow the ruble to rise as it targets a free float regime and uses a stronger currency to cap inflation, Barbara Nestor, an emerging-markets strategist at Commerzbank in London, said in an April 12 note.

To contact the reporter on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net

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