Russian Central Bank Unexpectedly Raises Main Rates, Reserve Requirements

Russia’s central bank unexpectedly lifted the refinancing rate from a record low, the first increase since December 2008, and boosted reserve requirements for a second month to curb inflation.

Bank Rossii raised its main rates 0.25 percentage point, boosting the refinancing rate to 8 percent, the overnight deposit rate to 3 percent and the overnight auction-based repo rate to 5.25 percent, it said today in a statement on its website. Economists expected the refinancing and the repo rates to be left unchanged and the deposit rate to rise, according to the median estimate of 18 economists in a Bloomberg survey.

Russians see inflation, the fastest among the so-called BRIC countries, as the country’s biggest challenge facing the country, according to a poll by the state-run VTsIOM research center. Prime Minister Vladimir Putin’s administration has sold discounted grain from state stockpiles and ordered oil companies to cut prices for gasoline and diesel to stem price increases.

“Now that inflation is starting to approach 10 percent, that’s kind of a threshold level,” Sanna Kurronen, a Helsinki- based economist at Danske Bank A/S who correctly predicted the increases, said today by phone. “Now they really want to respond more aggressively.”

Ruble Gains

The ruble strengthened after the decision, gaining 0.3 percent to 28.9198 per dollar by 2:26 p.m. in Moscow, bringing its seventh weekly gain to 0.9 percent. A close at that level would be its strongest since Nov. 25, 2009. The ruble- denominated Micex Index of 30 stocks was 0.3 percent stronger, at 1720.94.

Policy makers worldwide are grappling with rising food and energy prices. China increased reserve requirements and boosted interest rates this month as inflation quickened to 4.9 percent, above the government’s target. Brazil raised its main overnight rate on Jan. 19 after three increases in 2010. India, which had inflation of 8.23 percent in January, boosted its benchmark rate to a two-year high on Jan. 5.

Global prices for food surged to a record high last month, a factor in sparking protests in North Africa that toppled the governments of Tunisia and Egypt.

Russian inflation was an annual 9.7 percent as of Feb. 21, up from 9.6 percent in January, the central bank said today. Policy makers also lifted mandatory reserve requirements for liabilities to 4.5 percent from 3.5 percent for non-resident companies and to 3.5 percent from 3 percent for all others.

‘High Time’

Finance Minister Alexei Kudrin, a deputy to Putin, yesterday said that it was “high time” for additional measures to be taken to curb inflation.

“The decision is made due to high inflationary expectations and taking into account the emerging conditions for capital inflow into Russia on the back of high oil prices,” the central bank said in the statement. The increases take effect Feb. 28.

Eighty percent of the country’s public believes inflation is “very high,” compared with 65 percent in December, according to a poll published yesterday by the state-run All- Russian Center for the Study of Public Opinion, or VTsIOM.

Retail sales rose in January at the slowest pace in a year as real disposable incomes shrank 5.5 percent for the first decrease since August 2009. That may weigh on retailers including X5 Retail Group, Russia’s largest grocer, and OAO Magnit, its largest competitor.

The unemployment rate rose to 7.6 percent in January, the highest level since April 2010, according to the statistics service.

‘Very Flexible’

Bank Rossii will also maintain a “very flexible” exchange-rate policy, allowing the ruble to strengthen to help slow inflation, Kudrin said on Feb. 21. Inflation will probably be between 7 percent and 8 percent this year, down from 8.8 percent in 2010, Economy Minister Elvira Nabiullina said on Feb. 22 in Moscow.

The ruble has gained more than 7 percent in the past three months versus the dollar, making it the best performer among more than 20 emerging-market currencies tracked by Bloomberg.

The central bank may face an “unpleasant” increase in speculative inflows if it would start “aggressively hiking its deposit rate,” Nikolay Podguzov, VTB Capital’s head of fixed- income research in Moscow, said by phone on Feb. 21.

Russia-focused equity funds had inflows for a 13th consecutive week, even as investors continued to flee developing markets, Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, said today by e-mail, citing EPFR Global data. Funds investing in Russian shares received $162 million in the week ended Feb. 23, down from $169 million the week before.

“This is a very strong message” from the central bank, Aurelija Augulyte, an emerging-market economist at Nordea Bank AB, said in an e-mail. Policy makers “will likely follow the policy mix approach similar to China -- raising rates and reserve requirements, or one at a time.”

The deposit rate may rise as much as 1 percent by year-end, she wrote.

To contact the reporter on this story: Scott Rose in London at rrose10@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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