Russia’s Unexpected Rate Decrease Signals Economic Concerns

Russia Unexpectedly Cuts Refinancing Rate to Shield Growth
The Russian national flag flies atop Bank Rossii, Russia's central bank, in Moscow. The refinancing rate was cut to 8 percent from 8.25 percent, effective Dec. 26, Bank Rossii said in a statement on its website today. Photographer: Andrey Rudakov/Bloomberg

Russia unexpectedly reduced its benchmark rate, suggesting policy makers see a global economic slump posing greater risks than inflation to the world’s biggest energy exporter.

The refinancing rate was reduced to 8 percent from 8.25 percent, Bank Rossii said in a statement on its website today. The move was forecast by two of 22 economists in a Bloomberg survey. Separately, the difference between the main lending and deposit rates was cut a quarter-point to 1.25 percentage points, the narrowest ever.

Russia joins nations from Brazil to Indonesia that are easing borrowing costs to manage the fallout from a slowdown in China and Europe’s deepening debt crisis. Prime Minister Vladimir Putin, who will run for president next year, is seeking annual expansion of as much as 7 percent while the central bank plans to reduce inflation to at least 5 percent by 2014.

“The central bank noticeably softened the tone of its statement, signaling that it will pay more attention to economic risks going forward,” Dmitry Polevoy, chief economist at ING Groep NV in Moscow, said by telephone today.

The ruble extended gains against the dollar after the announcement and closed 0.5 percent stronger at 31.21 in Moscow. The currency has weakened 6.8 percent against the central bank’s target dollar-euro basket since the end of July.

Investors are betting interest rates will remain unchanged over the next three months, compared with expectations of as much as 21 basis points of increases on Nov. 24, according to forward-rate agreements tracked by Bloomberg.

Ignatiev ‘Surprised’

Central bank Chairman Sergey Ignatiev said yesterday he was “surprised” by the slow inflation even as the ruble’s recent slump may affect price growth next month. Risks to economic expansion “are strengthening” while inflation is at an acceptable level, Alexei Ulyukayev, a central bank first deputy chairman, said last week.

The overnight auction-based repurchase rate, Bank Rossii’s main lending tool, will stay at 5.25 percent and the overnight deposit rate, used to withdraw cash, will increase a quarter-point to 4 percent. Today’s moves are “neutral” to monetary policy, according to Bank Rossii.

Russia’s ruble bonds due 2016 rose, pushing the yield four basis points lower to 8.12 percent, the least since Dec. 16.

Shortage of Rubles

Policy makers also reduced the rate on fixed repurchase and Lombard auctions by 25 basis points, or 0.25 percentage point, to 6.25 percent. While the facilities are less important to banks than the auction-based rates, they have grown in importance because of the shortage of rubles, Polevoy said.

The MosPrime overnight rate, an average of what Moscow’s largest lenders offer to lend to one another, fell to 6.34 percent today after surging yesterday to 6.46 percent, the most since December 2009.

Bank Rossii is giving banks less short-term cash, with overnight repo auctions offering an average of 159 billion rubles ($5.1 billion) so far this month, down from 476 billion rubles in November, according to data compiled by Bloomberg.

That’s helping drive up interbank rates and in turn hurting demand for ruble-denominated bonds, Dmitry Pikin, a bond-fund manager at Moscow-based Gazprombank Asset Management that oversees more than 200 billion rubles of investments, said in a telephone interview yesterday.

Curbing Inflation

The shortage of rubles in the banking system since September will help curb inflation next year, policy makers said in the statement. The government’s decision to delay price increases for utilities to July from January will bring a “substantial slowdown in the annual inflation rate” early next year, according to the statement.

Inflation eased to 6.4 percent from a year earlier as of Dec. 19, down from 6.8 percent in November, the regulator said. Year-to-date price growth was at 6 percent as of that date, the government said this week.

Record-low inflation may help Putin solidify voter support after his ruling United Russia party won less than half of the vote in a Dec. 4 parliamentary poll. Tens of thousands of people joined protests in Moscow after allegations of ballot-box stuffing.

“Inflation risks associated with eased fiscal policy and election populism remain high,” Julia Tsepliaeva, head of research at BNP Paribas in Moscow, said by e-mail.

Russia’s federal budget surplus, which swelled to as much 3.2 percent of economic output in the year through October, will narrow to no more than 0.8 percent for the full year, Finance Minister Anton Siluanov said this week.

Shelter from Europe

Inflation at the lowest since August 2010 is bolstering purchasing power and helping shelter the economy from a slowdown in Europe. GDP may expand 4.5 percent this year and 3.7 percent in 2012, according to the Economy Ministry. Even so, more than half of Russians still see the inflation level as “very high,” a poll showed last month.

Putin told business leaders this week that he wants growth of as much as 7 percent to help turn Russia into one of the world’s five largest economies in five years.

Economic output will grow a “subdued” 3.5 percent next year with “significant downside risks” from Europe’s debt crisis, Juha Kahkonen, the head of the International Monetary Fund’s mission to Russia, said Dec. 8.

Weighing on Investment

“While consumer demand remains strong, supported by growth in public wages, a liquidity shortage and increased political uncertainty are weighing on investment activity and industrial production,” Natalia Novikova and Elina Ribakova, economists at Citigroup Inc. who correctly forecast the refinancing rate cut, said in an e-mailed note. They predicted the repo rate may be reduced “in early 2012.”

Since the auction-based repo rate “is the most relevant policy rate in the current times of tight liquidity conditions, we interpret the decision as an attempt from the central bank to deliver the most cautious of easings possible,” Ivan Tchakarov, chief economist at Renaissance Capital in Moscow, said by e-mail.

In September, Bank Rossii lifted the deposit rate by a quarter point while cutting the overnight auction-based repurchase rate by the same amount. That narrowed the so-called rate corridor in which money-market costs tend to fluctuate to 1.5 percentage points from 2 percentage points. The next rates meeting is planned for the first 10 days of February.

“We believe the ‘true’ easing of monetary policy by cutting the actively used repo rates is imminent,” Vladimir Pantyushin, chief economist at Barclays Capital in Moscow, said in an e-mailed note. “We expect the bank to wait until the end of March to avoid a potential unpleasant inflation surprise on the eve of March 4 presidential elections.”

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