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Russia Probably Won't Raise Rates This Year, Ending Era of `Easy Money'
Russia’s central bank is unlikely to raise the refinancing rate this year, ending the era of “easy money” for carry trades, Bank Rossii First Deputy Chairman Alexei Ulyukayev said.
The central bank left its main rate unchanged at 7.75 percent Aug. 31, after policy makers said inflationary pressures triggered by the worst drought in at least 50 years can’t be stemmed by monetary policy. So-called carry trades let investors make money by borrowing in countries with low interest rates and investing where rates are higher.
“There is always a possibility, but it’s very small” that the rate will be raised, Ulyukayev said today in the Black Sea city of Sochi. “For international currency speculators, the epoch of making easy money is over.”
Speculative investors can rapidly move large sums of money into and out of Russian assets, creating volatility that threatens economic “stability,” the central bank said in March. High capital inflows also impede the regulator’s efforts to contain inflation.
Net capital outflow was $52.4 billion last year and a record $130 billion in 2008 when oil prices dropped and global credit markets dried up. That compares with a record net inflow of $83 billion in 2007. Russia will probably have a net outflow this year of about $10 billion this year, Deputy Economy Minister Andrei Klepach said Aug. 30.
‘Free-Floating’ Ruble
Ulyukayev, 54, reiterated the central bank’s goal of moving to a “free-floating” ruble. The bank currently buys and sells currency on the market to steer the ruble’s value against its basket of euros and dollars.
“We will participate in the market in order to smooth excessive volatility” of the currency’s exchange rate, Ulyukayev said.
In addition to financial speculators, Russia is battling the effects of drought and record-high temperatures that are forecast to cut the nation’s grain harvest by a third this year, boosting food prices.
The Economy Ministry raised its forecast for 2010 inflation this week to between 7 percent and 8 percent from the previous 6 percent to 7 percent.
The forecast is “realistic,” Ulyukayev said. Consumer prices probably increased 0.6 percent in August from the previous month and are likely to rise less than 0.2 percent a week in September, he estimated.
‘Anomalous Weather’
“Anomalous weather conditions affected inflationary expectations,” Ulyukayev said. “The current acceleration of inflation” is “local” in nature, he said, adding that the drought may continue to affect prices for as long as a year.
Consumer prices rose 0.1 percent in the week to Aug. 30, the Federal Statistics Service said. That translates to annual inflation of 6.2 percent in August, up from a record-low 5.5 percent in July, according to VTB Capital’s estimates.
Agriculture Minister Elena Skrynnik said yesterday that Russia has enough grain too fulfill domestic needs and won’t import grain during this marketing year. Russia will harvest between 60 million and 65 million metric tons of grain this year, she said.
The comments “will likely help calm domestic prices further, eventually translating into a further correction in retail prices,” Aleksandra Evtifyeva and Dmitry Fedotkin, economists at VTB Capital in Moscow, said today in a research note.
“The end of the harvest season will, in our view, bring more clarity on upcoming food price dynamics,” Evtifyeva and Fedotkin said.
To contact the reporters on this story: Anton Doroshev in Sochi via the Moscow newsroom at adoroshev@bloomberg.net; Maria Levitov in Moscow at mlevitov@bloomberg.net
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