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Russia May End 6-Month Monetary Tightening on Prices, Crisis

Russia May Pause Six-Month Monetary Tightening on Prices
Bank Rossii will hold its refinancing rate at 8.25 percent at a policy meeting today after two increases this year, according to 18 of 19 economists in a Bloomberg News survey. Photographer: Alexander Zemlianichenko Jr/Bloomberg

Russia’s central bank may refrain from monetary tightening for the first time since November as inflation slows and Europe’s debt crisis threatens to sap a rebound in global economic growth.

Bank Rossii will hold its refinancing rate at 8.25 percent at a policy meeting today after two increases this year, according to 18 of 19 economists in a Bloomberg News survey. The overnight auction-based repurchase rate will be kept at 5.5 percent while the overnight deposit rate will remain at 3.5 percent and reserve ratios will be unchanged, according to three separate surveys.

The central bank has been raising interest rates and reserve requirements every month since December to soak up excess cash and combat the fastest price growth among the so-called BRIC countries. Risks from a slowing economy and inflation are now balanced for the “coming months,” policy makers said in May.

“There has been a noticeable slowdown in the weekly inflation rate,” Vladimir Tikhomirov, chief economist at Moscow-based Otkritie Financial Corp., said by e-mail yesterday. That may “serve as a reason for the central bank to pass on any active interest-rate measures.”

Investor Bets

Investors have scaled back bets for higher interest rates. Forward-rate agreements show the likelihood of 35 basis points of interest-rate increases in the next three months, down from 63 basis points on May 17, Bloomberg data show.

The cost to fix payments on ruble debt using one-year swap contracts dropped 26 basis points, or 0.25 percentage point, from last month’s peak on May 23 to 4.805 percent today, according to data compiled by Bloomberg.

The ruble climbed for a third day, poised for the strongest closing level in more than two weeks and helping to tame prices on imported goods. The currency gained 0.3 percent to 27.8849 per dollar as of 10:29 a.m. in Moscow, extending its advance this quarter to 1.9 percent. The ruble was little changed against the euro at 40.40, leaving it steady at 33.5167 versus the central bank’s target dollar-euro basket.

Lowest Since 1991

Consumer prices were unchanged for two weeks this month, failing to grow for the first time since May last year. Consumer prices rose 9.6 percent in May from a year earlier, matching a 19-month high. Chairman Sergey Ignatiev is targeting inflation of between 6 percent and 7 percent, the lowest level since the Soviet Union collapsed in 1991.

Slower weekly price growth this month will probably bring inflation down to 9.5 percent in June from a year earlier, VTB Capital economists led by Alexei Moiseev said by e-mail today.

Policy makers are trying to keep inflation from cutting into consumer incomes before parliamentary elections in December and a presidential vote early next year. Gross domestic product per capita should nearly double in the next decade to $35,000 from around $19,000 now, Prime Minister Vladimir Putin has said.

Consumer prices will rise no more than 5.2 percent in the first half and another 0.3 percent to 0.4 percent in the third quarter, Alexei Ulyukayev, a Bank Rossii first deputy chairman, said June 17. The central bank is “comfortable” with current interest rates and “very likely won’t need to change them” in the coming months, he told the Vedomosti newspaper in an interview published June 6.

Debt Crisis

Europe’s debt crisis is imperiling a global recovery, with the U.S. Federal Reserve earlier this month lowering its growth forecast for the world’s largest economy. The slowdown threatens to erode demand for Russia’s commodities exports.

“There’s been alarming news from Europe, from the U.S., from Japan,” Elena Matrosova, a Moscow-based economist at BDO International, a financial adviser that lists the central bank among its clients, said yesterday by e-mail. “That’s where the primary risks to the Russian economy are coming from.”

Urals crude, Russia’s main export blend, dropped 13 percent from this year’s high on April 8 to $106.48 a barrel.

Russia’s economy grew 4.1 percent in the first quarter from a year earlier, compared with 4.5 percent in the previous three months. Industrial production, which propelled the economy’s 4 percent expansion last year, has slowed since January to the lowest level since 2009.

Keeping Up

The country should seek growth of at least 8 percent annually within five years to keep up with other major emerging economies, President Dmitry Medvedev said in January.

The central bank began lifting borrowing costs in December after pushing the refinancing rate to a record low of 7.75 percent. Bank Rossii raised all of its key rates in February and April and also raised the deposit rate, used to absorb liquidity, a further two times in December and May. Banks’ reserve requirements were lifted three times this year.

The increases, some of which surprised the market, were intended by Bank Rossii to “stress its commitment to lowering inflation,” Yaroslav Lissovolik, chief strategist at Deutsche Bank AG in Moscow, said by phone. Policy makers are now seeking to manage inflation expectations by communicating its intentions on monetary policy more clearly to the market, he said.

Money held on correspondent accounts and deposits at the central bank, a key indicator of liquidity, has averaged 798 billion rubles ($28.6 billion) this month, down from 1.4 trillion rubles in January, Bloomberg data show.

“Excess liquidity may still be an important factor this year because budget expenditures will grow,” Lissovolik said. “It’s also possible we’ll have capital inflows after the significant outflow in the preceding months.”

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