Russia to Hold Rates Before Pro-Growth Putin Ally Takes Helm

Russia will probably leave borrowing costs unchanged for a sixth month as the central bank resists government pressure to trim rates before President Vladimir Putin’s economic aide takes charge of monetary policy.

Bank Rossii will hold the refinancing rate at 8.25 percent tomorrow at a meeting in Moscow, according to all 28 economists surveyed by Bloomberg. The overnight and one-week repurchase rates will stay at 5.5 percent, while the overnight deposit rate will be kept at 4.5 percent, separate surveys showed.

Central bank Chairman Sergey Ignatiev is leading a charge against inflation, which has surged to the fastest pace in 18 months, prioritizing price growth even as officials call for monetary stimulus to revive a flagging economy. Putin, who’s said all state institutions should be steered toward promoting growth, selected his own economic aide, Elvira Nabiullina, to take the reins when Ignatiev steps down in June.

“Inflation won’t start to decelerate before April,” Maria Pomelnikova, an analyst with ZAO Raiffeisenbank in Moscow, said yesterday by phone. “The central bank may start to ease monetary policy that month.”

The ruble, which has weakened 1.2 percent against the dollar this year, was little changed at 30.7960 against the U.S. currency at 5:37 p.m. in Moscow. The Micex Index (INDEXCF) rose for the first time in three days, gaining 0.3 percent to 1,501.80.

Faster Inflation

While Russia’s economy is growing at the weakest pace since a recovery began in 2010, inflation has gathered speed, stoked by a bad harvest and higher excise taxes and transport costs.

Gross domestic product rose 1.6 percent from a year earlier in January, compared with 2.4 percent in December, less than the 5 percent growth goal set by Prime Minister Dmitry Medvedev. Consumer prices advanced 7.3 percent in February, accelerating from 7.1 percent in January and 6.6 percent in December.

Economic output remains near full capacity, while inflation will probably exceed policy makers’ target range of 5 percent to 6 percent until the second half of the year, the central bank said Feb. 12.

The appointment of a Putin ally to lead the central bank will probably stoke expectations of looser policy, Benoit Anne, head of emerging-markets strategy at Societe Generale SA (GLE) in London, said March 12. Ignatiev will remain chairman through the end of his term until June 23, Putin’s spokesman, Dmitry Peskov, was cited as saying today by state-run RIA Novosti.

Easing ‘Risk’

The central bank’s monetary-policy approach “isn’t likely to shift drastically with Nabiullina, but there’s the risk of rate cuts because she’s from Putin’s team and headed the Economy Ministry, which is more concerned about growth than inflation,” Dmitry Polevoy, an economist for Russia and Kazakhstan at ING Groep NV (INGA) in Moscow, said yesterday by phone.

Still, borrowing costs were likely to be trimmed even without the change of stewardship as price growth fades, according to Natalia Orlova and Dmitry Dolgin, analysts at Alfa Bank in Moscow.

“An interest-rate cut will take place regardless of the selection of the new governor,” they said yesterday in an e- mailed note. “We expect inflation to slow after reaching a peak in April-May and anticipate a 25 basis-point rate cut in June- July as soon as the new governor is appointed.”

Economists in a Bloomberg survey forecast a quarter-point reduction in the refinancing rate in the second quarter and another in the fourth. Ignatiev, who’ll stay on at the central bank as an adviser, said Feb. 15 that he “hopes” inflation will start to slow in the coming months and with slower price growth, rate cuts are “possible.”

Protecting Credibility

The central bank may begin easing monetary policy before Nabiullina assumes her new role to “protect her credibility,” according to Moscow-based VTB Capital’s chief economist for Russia Maxim Oreshkin, the only analyst to correctly predict a quarter-point reduction in the cost of swapping foreign currency into rubles and an increase of that amount in the deposit rate at the central bank’s Dec. 10 meeting.

“We think Nabiullina would bring a slightly more dovish bias, but are keeping our base-case scenario almost unchanged,” he said yesterday in an e-mailed note, predicting 75 basis points of rate cuts in the second and third quarters. “At the same time, we do not expect any front-loaded policy easing, as she will try to win more credibility in the first months of her governorship.”

To contact the reporter on this story: Olga Tanas in Moscow at otanas@bloomberg.net

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

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