Russia’s central bank unexpectedly raised all policy rates by a quarter-point after inflation exceeded its target, splitting from policy makers in other major economies focused on bolstering economic growth.
The Moscow-based Bank Rossii raised the refinancing rate to 8.25 percent from 8 percent, the first increase in 16 months, it said in a statement on its website today. The overnight auction-based repurchase rate will rise to 5.5 percent from 5.25 percent and the overnight deposit rate to 4.25 percent from 4 percent, effective tomorrow. Three of 15 economists forecast an increase in the refinancing rate in a Bloomberg survey with the rest predicting no change.
“This is a very strong signal,” Vladimir Pantyushin, the chief economist at Barclays Plc. (BARC)’s Moscow-based investment banking unit, said by phone today. “This is a clear confirmation of their transition to inflation targeting.”
Russia, which wants to complete a shift to inflation targeting in 2014, is breaking from policy makers around the world, including in major emerging economies such as China, Brazil and India who eased monetary policy this year to boost their economies.
The ruble extended gains after the decision, strengthening 0.8 percent against the dollar to 31.2625 by the 7 p.m. close in Moscow. That’s the strongest level since May 22. Russia’s ruble bonds due June 2017 fell, lifting the yield 28 basis points to 7.77 percent.
The cost to fix floating interest payments in rubles for a year rose for the first time in two weeks, adding 11 basis points to 7.62 percent, data compiled by Bloomberg show. A close at that level would be the biggest jump since July 23.
Russian consumer prices advanced 6.3 percent from a year earlier as of Sept. 10, above the top end of policy makers’ tolerance range, the central bank said today. Inflation accelerated to 5.9 percent in August, the fastest this year, as droughts from the U.S. to Russia damaged crops and drove up food prices.
Bank Rossii is seeking to hold inflation at 5 percent to 6 percent this year before cutting that range by a half-point in each of the next two years.
“The decision was made based on rising prices and inflation expectations, which increase the risks of exceeding Bank Rossii’s medium-term parameters for inflation, and also taking into account estimated prospects for economic growth” the central bank said in the statement.
Brazil cut its benchmark Selic rate to a record-low 7.5 percent last month, while Chinese Premier Wen Jiabao said slowing inflation in his country offered policy makers room to bolster the economy after signs of weakening growth.
The U.S. Federal Reserve will probably announce a third round of bond purchases today, according to almost two-thirds of economists in a Bloomberg survey, while also extending the duration of its zero-interest-rate policy into 2015.
Bank Rossii “had to react to elusive inflation targets,” Vladimir Kolychev, head of research at Societe Generale SA (GLE)’s OAO Rosbank (ROSB) unit in Moscow, who correctly predicted the rate increases, said by e-mail.
“The decision adds to the evidence that the central bank’s reaction function is more inflation averse and forward looking than might be broadly perceived by the market,” Kolychev said.
Russia’s rate increase will have “mostly signaling effects” and indicates that inflation risks are “somewhat overestimated,” while threats to economic growth are “unfairly ignored,” Dmitry Polevoy, the Moscow-based chief economist of ING Groep NV (INGA)’s Russian unit, said in an e-mail.
It was “a hawkish move in a dovish world,” Polevoy said. Still, the central bank “is the king and, given its reasoning, more hikes couldn’t be excluded now.”
President Vladimir Putin, who returned to the Kremlin for a third term in May, has touted last year’s record-low 6.1 percent inflation rate as a major economic success and told investors and foreign leaders at an Asia-Pacific Economic Cooperation summit last week that Russia would continue cutting inflation.
This year’s grain harvest will reach 70 million to 75 million tons, down from 94.2 million tons in 2011 because of drought, the Agriculture Ministry said in August.
“The fact that the rate increase came today was unexpected but it was bound to happen sooner or later,” Sergey Fundobny, the head of research at Arbat Capital Management in Moscow, said by phone. “It was clear the central bank would take steps to curb inflation, which was starting to spiral out of control.”
Economic growth in the world’s largest energy exporter slowed to 4 percent from a year earlier in the second quarter as China’s cooling expansion and Europe’s debt crisis sapped demand for Russian commodities exports.
Russia’s economic expansion may slow to less than 3 percent on an annual basis in the second half, down from 4.5 percent in the first six months, as energy exports stagnate, Economy Minister Andrei Belousov told lawmakers in Moscow yesterday.
Growth will slow next year from 2012, according to German Gref, chief executive officer at OAO Sberbank, Russia’s largest lender.
“We’re clearly seeing lower demand and falling prices for our exported goods,” Gref told reporters in Moscow yesterday. “Growth is slowing in China, and we see what’s happening in the euro zone, so I think this is a trend we’ll have to come to terms with.”
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