Russia’s central bank signaled for the first time this year that it was prepared to combat inflation with higher rates as risks to economic growth (RUDPRYOY) fade.
Policy makers voted to hold the refinancing rate at 8 percent, a quarter point above the record low, for a seventh month, Bank Rossii said today in a statement on its website. Money-market rates were at an acceptable level for the “nearest future,” the bank said, dropping a reference to the “coming months” used after every rates meeting this year.
The decision keeps the world’s largest energy exporter on the sidelines of a global push for monetary stimulus as Europe’s debt crisis threatens to derail the world economy. Brazil, India, South Korea and China have reduced borrowing costs this year to ease credit flows and spur growth.
“They’re freeing their hands to take any policy-rate actions that may seem appropriate down the road,” Alexander Morozov, chief economist at HSBC Holdings Plc (HSBA) in Moscow, said by telephone. “Overall it means a shift in terms of the balance between inflation and economic growth risks in favor of a higher risk related to inflation.”
Russian bonds advanced, sending yields to near two-month lows. The country’s ruble-denominated bonds due in 2021 rose after the announcement, bringing the yield down 15 basis points to 7.96 percent, the lowest since May 3. Russia’s 2018 ruble Eurobond also rose, cutting the yield 7 basis points to 6.291 percent.
Central bank Chairman Sergey Ignatiev has set out to cap inflation at 5 percent to 6 percent this year after delivering record-low price growth in 2011. The regulator is shifting to targeting inflation and aims to limit price growth to 5 percent in 2014.
That goal has left Russia as the last major emerging market to hold rates this year. Central bankers in China, Russia’s largest trading partner, have cut rates twice since the start of June to reverse a slowdown in growth. The Bank of Korea unexpectedly cut borrowing costs for the first time in more than three years yesterday after Brazil reduced its benchmark rate for an eighth straight time.
Bank Rossii also held the auction-based repurchase rate, its main tool for providing rubles to lenders, at 5.25 percent and the overnight deposit rate at 4 percent. This month’s change in wording may mean an increase in Russia’s policy rates should inflation concerns persist and growth remain strong, Morozov said.
Inflation was 5 percent as of July 9 compared with a year earlier, the fastest pace since December, Bank Rossii said in the statement. Consumer prices rose 4.3 percent from a year earlier in June, up from a record-low 3.6 percent the previous month after a drop in the ruble stoked costs for imported food.
The government’s failure to cope with rising prices and falling incomes remains Russians’ top grievance with policy makers, according to a poll published yesterday by the Moscow-based Levada Center. Forty-five percent of respondents said it was a top concern, 15 percentage points above the next biggest complaint over authorities’ inability to create jobs.
The government also increased prices on utilities such as electricity and water from July 1, six months later than usual, contributing to the increase in prices, the Federal Statistics Service said July 11. Inflation in the year to date was 4 percent as of July 9, down from 5.1 percent in the same period last year, the service said.
Growth in Russia, the world’s ninth-largest economy, slowed in the second quarter to about 3.9 percent or 4 percent, Economy Minister Andrei Belousov said late yesterday in Yalta, Ukraine. Still, the government may raise its 2012 economic growth forecast to as much as 4 percent from 3.4 percent now as investment and retail sales grew more than forecast, he said last month.
Russian economic output “remains near its potential level,” and demand is not yet putting pressure on prices, Bank Rossii said in the statement. Retail sales “remain high,” with lending to households and low unemployment seen supporting consumer demand going forward, policy makers said.
Bank Rossii and the Russian government have signaled they are “quite afraid” of accelerating inflation, Vladimir Miklashevsky, an economist at Danske Bank A/S (DANSKE) in Helsinki, said by e-mail.
“It is understandable from their point of view,” he said. “High inflation is politically dangerous.”
Accelerating food-price inflation “combined with uncertainty regarding this year’s harvest of the main crops has become a source of additional inflationary risks” the central bank said today.
Russia’s grains and legumes crop will be about 85 million metric tons, below the previous estimate of 94 million tons, Agriculture Minister Nikolai Fedorov said June 25.
Still, that doesn’t mean Bank Rossii will rush to tighten monetary policy, according to Dmitry Polevoy, chief economist for Russia at ING Groep NV (INGA) in Moscow.
“The inflation shock comes from regulated tariffs, a low base effect, and a rebound in food prices from the bottom,” he said in an e-mail to clients. The factors are “all transitional in nature and so will start reversing in the first half of 2013.”
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