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Russia Leaves Main Rates Unchanged, Discounting Drought-Fueled Inflation
Russia’s central bank left its main interest rates unchanged as policy makers said inflationary pressures triggered by the worst drought in at least 50 years can’t be stemmed by monetary policy.
Bank Rossii kept the refinancing rate at a record-low 7.75 percent, in line with the expectations of all 13 economists surveyed by Bloomberg. The Moscow-based bank also left the repurchase rate on one- and seven-day loans unchanged at 6.75 percent. The regulator last cut rates May 31.
“The central bank currently doesn’t see enough basis for making a conclusion about a negative effect of the said price shocks on inflation in the medium- or long-term,” the central bank said today in a statement.
Russia’s refinancing rate is “appropriate and it shouldn’t be changed because of higher inflation,” Finance Minister Alexei Kudrin told reporters on Aug. 28. “Monetary measures” can’t contain price increases fueled by the drought, he said.
The Economy Ministry raised its 2010 inflation forecast to between 7 percent and 8 percent from the previous estimate of 6 percent to 7 percent after the drought reduced harvests and prompted the government to ban grain exports at least through the end of this year, Deputy Economy Minister Andrei Klepach said yesterday.
Increases Ruled Out
“Kudrin’s comments probably rule out any policy rate hikes by the central bank in the near future,” Aleksandra Evtifyeva and Dmitry Fedotkin, economists at VTB Capital in Moscow, said in an e-mailed note today.
The central bank said today it “deems it appropriate to keep the current monetary and credit policy parameters for the coming months, which should facilitate a further growth of banks’ credit activity and provide support for the economy to enter the trajectory of stable growth.”
The ruble pared its declines after the decision, trading at 30.8444 as of 3:18 p.m. in Moscow. The Russian currency was little changed at 39.0940 per euro.
The drought is also set to push up consumer prices next year, with inflation reaching 6 percent to 7 percent, Klepach said. Domestic demand is strong and is set to boost retail sales and industrial output, fueling economic growth of 4.2 percent in 2011, up from the previous estimate of 3.4 percent, he said.
Price Focus
“Food prices are likely to be in focus over the next few months as the extent of the damage to crops from drought is revealed,” Anna Zadornova, a London-based economist at Goldman Sachs Group Inc., said in a research note before the decision. “We think that headline inflation reached a bottom in July, but expect the rise in the second half to be moderate.”
The central bank is likely to keep interest rates on hold until the end of the year when inflation reaches an annual 6.8 percent, Zadornova estimates. Inflation slowed to a record-low 5.5 percent in July.
Kudrin estimated the inflation rate for 2010 will reach a maximum of 7.5 percent, and the ruble will remain “approximately at the current level.”
“The central bank should conduct a flexible exchange-rate policy,” he said.
“As to the ruble, we agree with Kudrin that it is currently near the equilibrium level as the central bank has cut FX interventions to a minimum,” VTB’s Evtifyeva and Fedotkin said.
‘Smooth Out Volatility’
While the central bank will continue to buy and sell foreign currency to “smooth out the volatility” of the ruble, “we will not set a target for the ruble’s nominal or real exchange rate,” Bank Rossii First Deputy Chairman Alexei Ulyukayev said on June 29.
The ruble will probably average 30.4 per dollar this year and 30.5 against the greenback in 2011, according to the Economy Ministry.
Russian bank lending expanded last month as overdue loans slid from a June 1 peak, Mikhail Sukhov, a central bank board member and department head said Aug. 26. Corporate lending rose 0.3 percent in July, while retail lending climbed 1.6 percent in the month, he said.
“The crisis of short-term liquidity is over,” Garegin Tosunyan, president of the Russian Association of Banks, said Aug. 26 at a banking conference in Nizhny Novgorod.
Cost of Drought
Russia’s economy contracted a record 7.9 percent last year as the world’s biggest energy exporter suffered a deeper recession than Brazil, one of the other so-called BRIC countries. China GDP expanded about 9 percent and India’s 7.2 percent.
After Russian macroeconomic indicators showed a “significant” improvement in the second quarter, industrial production, capital investment and unemployment showed a “slowing recovery of economic activity” in July, the central bank said today.
“The risks to stable growth remain,” it said in the statement.
The drought will cost Russia as much as 0.8 percentage points of growth this year, though the economy will still expand 4 percent, according to the Economy Ministry. Gross domestic product is set to expand 4.2 percent in 2011, fueled by retail sales and industrial output, the ministry estimates.
“Tightening of monetary policy in the current conditions could cancel the recovery of the economy,” Moscow-based Trust Investment Bank said today in an e-mailed note.
To contact the reporter on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net
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