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Russia Needs to Lower Rates to Protect Economy, RenCap Says

A worsening global outlook may pressure Russia to cut interest rates by half a percentage point this year to shield the economy, Renaissance Capital said.

“The ever-darkening global backdrop, a now-certain European recession, significant growth deterioration in the U.S. and a soft landing in China all argue for the Russian central bank to strike pre-emptively,” Ivan Tchakarov, chief economist at the Moscow-based investment bank, said today in a note e-mailed to clients.

The central bank should reduce its refinancing rate and overnight auction-based repurchase rate by 25 basis points, or 0.25 percentage point, at a meeting Nov. 25 and by another quarter-point by the end of the year, Tchakarov said later in an e-mailed response to questions.

Policy makers are shifting their focus to safeguarding growth as Europe’s debt turmoil and a struggling U.S. economy increase the risk of another global recession. Russia cut some lending rates for the first time in 15 months in September and Australia, Serbia and Indonesia reduced borrowing costs this month. Sergey Ignatiev, Bank Rossii’s chairman, said last week he was “very concerned” about capital outflows that reached $64 billion through October.

Russia’s central bank, which left rates unchanged last month, may now see scope to decrease borrowing costs to increase the amount of cash available in the banking system, RenCap said.

Alleviating Pressure

“Lower rates would have the additional benefit of alleviating the high pressure in the money market, which has been driven by declining banking-sector liquidity and strong net capital outflows,” Tchakarov wrote.

Money held on correspondent accounts and deposits at the central bank, a key indicator of liquidity, has averaged about 860 billion rubles ($28 billion) this month, down from about 1.5 trillion rubles in January, according to data compiled by Bloomberg.

In addition to reducing the repo rate, the Bank Rossii policy tool closest to money-market rates, the central bank should reduce the higher refinancing rate, which functions as a “signaling device” for lenders, Tchakarov said.

The move would further tighten the so-called interest-rate corridor between the overnight repo rate at 5.25 percent charged on loans from the central bank and the regulator’s main borrowing rate -- the overnight deposit rate at 3.75 percent. The corridor helps contain the volatility of money-market rates within the band targeted by policy makers.

In September, the central bank raised the deposit rate by a quarter-point and cut the repurchase rate by the same amount. Bank Rossii lifted the refinancing rate twice this year by a quarter-point to 8.25 percent, from 7.75 percent in February, with the last increase coming in May.

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