Russia Seen Holding Key Rate After Emergency Increase

Russia’s central bank will probably leave borrowing costs unchanged after an emergency interest-rate increase last week failed to staunch a decline in the ruble amid escalating tensions over Ukraine’s Crimea region.

Bank Rossii will keep its one-week auction rate, the benchmark introduced in September, at 7 percent at a meeting in Moscow tomorrow, according to 23 of 24 economists in a Bloomberg survey. One analyst forecast a cut to 6.5 percent.

Policy makers led by Chairman Elvira Nabiullina unexpectedly increased their main rate last week by the most since 1998, looking past the weakest economic growth in four years in a bid to arrest the currency’s plunge to a record. With regional authorities in Crimea planning to hold a referendum in three days on joining Russia, the crisis in Ukraine threatens to exacerbate the ruble’s 10 percent slide this year, putting at risk the central bank’s 5 percent inflation target.

“A rate cut before the referendum could be very destabilizing for the market,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said by phone yesterday. “All of the the central bank’s moves last week were aimed at managing the exchange rate and not the interest rate.”

The central bank, which sold almost $14 billion and 1.3 billion euros ($1.8 billion) in the first two months, spent more than $11 billion to stem the the ruble’s tumble on March 3 after President Vladimir Putin got approval from the upper house of parliament to send troops into Ukraine.

‘Quite Nervously’

“Investors reacted quite nervously to growing political tensions in Ukraine,” Nabiullina told Putin on March 5.

The ruble has lost 10 percent this year against the dollar, according to data compiled by Bloomberg, the worst performer among 24 emerging-market currencies after Argentina’s peso. It was little changed at 36.4960 against the dollar yesterday.

The three-month MosPrime rate, which large Moscow banks say they charge one another, may rise 99 basis points, or 0.99 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. That’s the most since September 2009 and compares with 38 basis points of increases seen on Feb. 13, when the central bank reviewed interest rates last month.

Tension is mounting between the Kremlin and the U.S. and its allies as Crimea prepares to vote on uniting with Russia. The Group of Seven countries yesterday accused Russia of trampling on international law by moving to annex the southern Ukrainian region, saying the Kremlin will face stiffer sanctions unless it pulls back troops and enters talks.

Freezes, Bans

European Union foreign ministers meet March 17 to consider asset freezes and travel bans on Russian political and business figures seen by the EU to have instigated and profited from the Russian takeover of Crimea.

The crisis is putting an added strain on Russia’s $2 trillion economy, which has decelerated for a fourth year in 2013 as consumer spending weakened and investment sagged along with demand for energy. Growth slowed to 1.3 percent last year from 3.4 percent in 2012.

While the situation in the Russian economy is “stable,” last year’s growth was “insufficient” and the current outlook and government forecasts “can’t satisfy us,” Putin told senior officials yesterday. The Economy Ministry projects growth will average 2.5 percent a year through 2030.

Inflation must be held at an “acceptably low rate,” Putin said, instructing the government to ensure its “ability to react immediately to internal and external risks.”

Inflation Boost

Consumer-price growth accelerated 6.2 percent in February from a year earlier after 6.1 percent in January. Bank Rossii is targeting an inflation rate at 5 percent this year after missing its range of 5 percent to 6 percent in 2013. The ruble’s decline in January and early February may add 0.5 percentage point to inflation, Nabiullina told reporters in Moscow on Feb. 14.

Bank Rossii, which raised its key interest rate by 1.5 percentage points on March 3, also decided to set the amount of foreign-currency sales needed to shift the ruble corridor on a daily basis, saying that was needed to help “prevent risks to financial stability by limiting ruble exchange rate fluctuations.”

The rate was increased temporarily as it imposes “some costs” on the economy, according to Nabiullina. Before the policy move last week, the central bank kept its main lending rates on pause for 17 months.

“During the next one or two months, we will see a higher inflation rate, near 6.5 percent, and not a good situation with capital flows,” Mikhail Gonopolskiy, head of investment strategy and macroeconomic forecasting at B&N Bank, said by e-mail. “We believe that there’s a chance high rates will be maintained at least till May-June.”

To contact the reporters on this story: Olga Tanas in Moscow at; Anna Andrianova in Moscow at

To contact the editors responsible for this story: Balazs Penz at Paul Abelsky, Agnes Lovasz

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