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Russia Signals Rates Will Be Held as Inflation Rate Drops

Russia refrained from cutting interest rates after a surprise reduction in December, signaling for the first time since August that borrowing costs may remain unchanged in the “coming months.”

Bank Rossii held the overnight auction-based repurchase rate used to provide cash for banks at 5.25 percent and the overnight deposit rate at 4 percent, according to a statement published on its website today. The refinancing rate stays at 8 percent, as forecast by 11 of 15 economists in a Bloomberg survey.

Policy makers are calibrating their stance after Russia followed emerging economies in lowering borrowing costs as Europe’s debt crisis threatened to stall global demand. The bank deems money-market interest rates “acceptable for the coming months to ensure a balance between inflation and growth risks,” according to the statement.

“Usually the market takes that phrase to mean that they have at least two months of peace,” Alexei Ulyukayev, a Bank Rossii first deputy chairman, said at an investment conference in Moscow after the decision. “It’s not only important what you do, but also how you explain it.”

The overnight MosPrime which banks say they charge to lend to each other fell to 4.49 percent today, the lowest since Oct. 7. Bank Rossii offered the minimum of 10 billion rubles ($331 million) at a repurchase auction today as liquidity concerns abate.

Ample Liquidity

Money held on correspondent accounts and deposits at the central bank, a key indicator of liquidity, rose to 1.09 trillion rubles today from as low as 786.9 billion rubles on Jan. 26, according to data compiled by Bloomberg.

The Micex Index of 30 stocks fluctuated between gains and losses after the announcement and was 0.1 percent higher at 1,544.23 as of 4:14 p.m. in Moscow. The ruble weakened 0.1 percent to 30.2399 per dollar.

Central bank Chairman Sergey Ignatiev wants to trim the inflation rate to about 5 percent to 6 percent in 2012 from a record-low 6.1 percent last year as economic expansion outpaces forecasts. Price growth fell to 4.1 percent as of Jan. 30 from a year earlier, according to the statement.

The world’s largest energy exporter grew faster than economists forecast last year, expanding 4.3 percent and returning to output levels before a 7.8 percent contraction in 2009. Officials may revise the figure up to 4.5 percent or more, Deputy Economy Minister Andrei Klepach said this week. Unemployment unexpectedly fell to 6.1 percent in December.

Do Nothing

“The central bank is exploiting the opportunity to do nothing, while inflation is still trending down,” Aurelija Augulyte, an emerging-markets economist at Nordea Bank AB in Copenhagen, said by e-mail. Inflation will probably accelerate in year-on-year terms in the second quarter, boosted by “robust domestic demand.”

OAO Magnit, the country’s largest food retailer by market value, was among the companies that benefited from surging domestic demand, posting a 20 percent gain in net income last year. OAO AvtoVAZ, the biggest carmaker, boosted Russian sales 11 percent in 2011.

‘Firm’ Demand

Policy makers said in the statement that consumption demand remained “firm” in December, while production data were “measured.” Retail sales, which rose the most in more than three years in December, were boosted by low unemployment, rising real incomes and a continued increase in retail lending, according to the statement.

Record-low inflation may help Prime Minister Vladimir Putin solidify voter support as he seeks to reclaim the presidency in March elections. Prices and poverty are seen as the biggest threats facing the country this year, according to a Jan. 31 poll by the independent Levada Center.

Policy makers will have a more difficult time meeting this year’s inflation target than they did in cutting price growth to 6.1 percent last year, Ulyukayev said today.

“A planned delay of increases on the majority of regulated prices and tariffs to mid-2012” contributed to slower price growth, policy makers said in the statement. “Bank Rossii is taking into account the temporary nature of this effect and continues to focus on mid-term inflation forecasts in its monetary policy decisions.”

Russia’s central bank unexpectedly cut the refinancing rate to 8 percent from 8.25 percent and lowered the rate on fixed repurchase facilities by a quarter point to 6.25 percent while raising the overnight deposit rate by the same amount to 4 percent at its last meeting in December.

‘Neutral’ Changes

The changes were intended to be “neutral” for monetary policy while helping policy makers manage interbank interest rates, which tend to fluctuate within that range, the central bank said in its statement.

The inflation rate fell to a “marvelous” 4.7 percent and may drop further in the near term, Ulyukayev said last week. Price growth this month probably won’t exceed the rate in January, when it reached about 0.5 percent, Klepach said Feb. 1.

Retail lending will slow “significantly” this year, while stagnation is “very probable” for manufacturers in the coming months, Klepach said. Gross domestic product will rise 3.7 percent this year, the government predicts.

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