Russia Set to Hold Rates as Ignatiev Sees Price Pressures Mount

Russia’s central bank will probably refrain from cutting interest rates for a fourth month after signaling concern about meeting its inflation target as the job market may overheat.

Bank Rossii will leave the refinancing rate at 8 percent when it meets today, according to 21 of 22 economists in a Bloomberg News survey. One analyst predicted a quarter-point cut. The overnight auction-based repurchase rate will stay at 5.25 percent and the overnight deposit rate will remain at 4 percent, two separate surveys showed.

The world’s largest energy exporter has kept borrowing costs unchanged even after the inflation rate fell to the lowest in two decades. China may ease policy to boost faltering growth and Brazil has cut its benchmark rate five times since August. While it’s “premature” to say Russia’s labor market is overheating, policy makers are watching the unemployment rate in steering policy, Bank Rossii Chairman Sergey Ignatiev said.

“Unemployment in seasonally adjusted terms is close to all-time lows,” Vladimir Osakovskiy, chief economist at Bank of America Merill Lynch in Moscow, said in a telephone interview April 6. “The last time they had this level of unemployment was during the red-hot economy of 2007 and 2008.”

Unemployment fell to 6.5 percent in February from 6.6 percent the month before, the lowest level for February since at least 1999, according to data compiled by Bloomberg. In seasonally adjusted terms, the jobless rate reached 5.8 percent and was only lower in the second quarter of 2008, when Russia’s economy was seen as “overheating,” according to Ignatiev.

Won’t Be Easy

The task of containing consumer-price growth within the target range of between 5 percent and 6 percent in 2012 “won’t be very easy,” after last year’s record-low 6.1 percent, Ignatiev said April 5.

The ruble jumped 9.2 percent against the dollar in the three months through March 31, beating Brazil’s, China’s and India’s currencies in its biggest quarterly appreciation on record. Urals crude oil, Russia’s chief export, gained 13 percent to $119.63 per barrel over the same period.

Investors are betting interest rates will drop 14 basis points, or 0.14 percentage point, over the next three months, compared with expectations of as much as 31 basis points of cuts on Feb. 7, according to forward-rate agreements tracked by Bloomberg. The three-month MosPrime rate banks say they charge to lend to each other in rubles has dropped 54 basis points this year.

Ten of 19 analysts surveyed by Bloomberg forecast a reduction of at least a quarter-point by the end of the year, while three predicted the year-end rate would be higher than the current 8 percent.

Rates Peaking

Borrowing costs for companies and the interest rates paid on bank deposits have probably crested and may soon begin falling, Ignatiev said in his address to the annual congress of the Association of Russian Banks. The average rate for loans to companies peaked at 9.3 percent in December from a low of 7.9 percent in July, he said.

Bank Rossii said after its meeting March 13 that market interest rates were at an “acceptable level for the coming months.” The phrase is usually interpreted by the market as meaning “at least two months of peace,” Alexei Ulyukayev, a central bank first deputy chairman, said in February.

The inflation rate in annual terms would be about 6 percent now, rather than 3.7 percent in February and March, without the effects of last year’s strong harvest and a delayed increase of prices by utilities, according to Ignatiev.

“Ignatiev’s guidance suggests little room for any cut in the central bank policy rates in the foreseeable future,” Natalia Orlova and Dmitry Dolgin, analysts at Alfa Bank in Moscow, wrote in an e-mailed research note April 6. “The favorable inflationary trend in the agricultural sector and the postponement of tariff increases has only delayed price growth.”

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

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

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