Russia’s Central Bank Signals Interest-Rate Pause After Surprise Increase
Russian Central Bank May Pause After Surprise Rate Increase
Alexander Zemlianichenko Jr/Bloomberg
Bank Rossii, the central bank, yesterday raised its overnight deposit rate to 3.5 percent from 3.25 percent, surprising 11 of 20 economists in a Bloomberg survey.
Bank Rossii, the central bank, yesterday raised its overnight deposit rate to 3.5 percent from 3.25 percent, surprising 11 of 20 economists in a Bloomberg survey. Photographer: Alexander Zemlianichenko Jr/Bloomberg
Russia signaled it may leave interest rates unchanged for several months after tightening monetary policy since December to balance accelerating inflation with slowing economic growth.
Bank Rossii, the central bank, yesterday raised its overnight deposit rate to 3.5 percent from 3.25 percent, surprising 11 of 20 economists in a Bloomberg survey. It left the refinancing and overnight repurchase rates unchanged after a quarter-point increase in April, saying in a statement that borrowing costs may be at the level necessary to tackle inflation and promote growth “for the nearest months.”
Sergey Ignatiev, chairman of the Moscow-based bank, is trying to limit consumer-price growth to 6 percent to 7 percent without stifling credit and undermining an economic recovery in the world’s biggest energy supplier. While inflation will probably ease in the second half of the year, increases in food prices and public-sector salaries may threaten that target.
“Most likely, the central bank won’t raise interest rates in the next three months,” Julia Tsepliaeva, head of research at BNP Paribas in Moscow, said yesterday by telephone. “Inflation could still bring a surprise, though, requiring more forceful action.”
While annual inflation reached an 18-month high of 9.7 percent as of May 23, price growth remains relatively low in monthly terms, the central bank said yesterday. May prices probably rose at the same pace as last year, when they increased 0.5 percent on the month, Ignatiev predicted last week. Food price increases slowed after the effects of the country’s worst drought in 50 years eased, the bank said.
‘Significant Risk Factor’
Consumer prices will rise 9.05 percent in 2011, according to the median estimate of 16 economists surveyed by Bloomberg.
A ban on grain exports introduced as a result of the drought will expire July 1, representing the “only serious, significant risk factor” for inflation, Ignatiev said yesterday, the RIA Novosti news service reported.
Removal of the ban may spark a surge in grain exports, pushing up domestic prices, according to Tsepliaeva. Russian grain prices are about half global levels, First Deputy Prime Minister Viktor Zubkov told Prime Minister Vladimir Putin in a meeting May 28, according to a government statement.
Increased government spending before parliamentary elections at the end of the year and a presidential vote in early 2012 may also boost inflation, said Ivan Tchakarov and Anton Nikitin, economists at Renaissance Capital in Moscow.
‘Key Risk’
“A substantial topping up of public sector wages and pensions in the run-up to the parliamentary and presidential elections” is a “key risk,” Tchakarov and Nikitin wrote in a May 26 research note. Higher oil prices may have created “some fiscal space to loosen the strings of the budget purse.”
Consumers are borrowing and spending more while saving less, which may boost economic growth and inflation, the bank said yesterday. Policy makers first flagged quickening credit growth and reluctance to save as inflation risks in April.
The central bank identified credit growth as a “new monetary risk to inflation” last month, said Jacob Nell, a Moscow-based economist at Morgan Stanley, before yesterday’s decision. Nell correctly predicted the deposit-rate increase.
While 20 percent lending growth is “fine” with the central bank, it may expand at a rate of as much as 23 percent this year, Ignatiev said last week.
Slowest BRIC Growth
The central bank cited high unemployment, slowing industrial production growth and an “extremely low” level of investment as key risks to the economy.
The slowest-growing economy among the so-called BRIC nations, Russia is relying on revenue from oil to bolster its recovery, at the same time it is seeking to reduce reliance on energy exports.
Oil at more than $100 a barrel is no longer stoking economic expansion, which slowed to 4.1 percent in the first quarter from 4.5 percent in the fourth. Growth slid to 3.3 percent in April, the Economy Ministry said May 26.
Putin and President Dmitry Medvedev are seeking faster growth. Putin said May 26 that Russia should boost per capita gross domestic product to $35,000 from about $19,000 within 15 years. The country needs growth of 8 percent to 10 percent annually within five years to keep up with emerging market peers Brazil, India and China, Medvedev said in January.
The economy will expand 4.5 percent next year, compared with 9.1 percent for China and 7.8 percent for India, the International Monetary Fund forecast in April. The Economy Ministry estimates growth at 4.5 percent this year, a target Ignatiev said May 26 would probably be met.
To contact the reporters on this story: Scott Rose in Moscow at rrose10@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net.
To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net.
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