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Russia Will Probably Hold Rates on Post-Election Inflation Risk

Russia will probably refrain from cutting rates after signaling that record-low inflation won’t last once pre-election measures to curb prices are unwound.

Bank Rossii will leave the refinancing rate at 8 percent, according to 19 of 20 economists in a Bloomberg News survey. The overnight auction-based repurchase rate used to provide cash for banks will stay at 5.25 percent and the overnight deposit rate will remain at 4 percent, separate surveys showed. The central bank will announce a decision today.

Russia is joining central banks in the European Union, U.S., Japan and U.K. in waiting to gauge the strength of the economic recovery before further reducing borrowing costs. The world’s largest energy exporter pushed inflation to a post-Soviet low of 3.7 percent during Prime Minister Vladimir Putin’s presidential campaign by capping fuel costs and delaying utility-price increases.

“There’s a risk that inflation will accelerate in the second half and that’s an unequivocal reason to leave the refinancing rate unchanged,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said yesterday in a telephone interview. “There was definitely control over prices during the elections.”

Investors are betting on lower interest rates, with forward-rate agreements signaling a decline of nine basis points, or 0.09 percentage point, in the next three months, compared with expectations of as much as 31 basis points of decreases on Feb. 7, according to data compiled by Bloomberg. The ruble appreciated 3.8 percent against the dollar in February for its second straight monthly gain. The Russian currency lost 0.4 percent to 29.6425 per dollar yesterday.

‘Two Months of Peace’

Policy makers left borrowing costs unchanged in February after unexpectedly cutting the refinancing rate by a quarter point in December while also raising the deposit rate, a shift they said should be “neutral” for monetary policy.

The market may expect “at least two months of peace” after Bank Rossii said rates were at an acceptable level for the “coming months,” First Deputy Chairman Alexei Ulyukayev said at an investment conference after the Feb. 3 decision.

Consumer-price growth slowed for a fourth month in February to 3.7 percent from a year earlier, the lowest rate since the Soviet Union collapsed in 1991. That left the refinancing rate 4.3 percentage points higher than inflation, the highest margin since 2003, according to data compiled by Bloomberg.

Putin’s Win

Putin, 59, won re-election to the Kremlin in a March 4 ballot with 64 percent of the vote, beating Communist Party runner-up Gennady Zyuganov, who took 17 percent. Putin’s pledges may raise government spending by $160 billion, or 8 percent of projected economic output, over his six-year term, Fitch Ratings estimated in a March 5 report.

The government delayed annual increases in most public-utility tariffs until July to avoid higher prices before the vote. Deputy Prime Minister Igor Sechin ordered Russia’s oil producers on Jan. 10 to cap retail fuel prices at December levels until after the election, Kommersant reported Jan. 23, citing unidentified company officials. Russian gasoline prices declined or were unchanged every week since the end of November.

The drop in inflation is primarily due to “pre-election administrative measures,” which won’t influence Bank Rossii’s decision on rates, Vladimir Kolychev and Vladimir Tsibanov, analysts at Societe Generale SA’s OAO Rosbank unit in Moscow, said in an e-mailed research note yesterday.

‘Spiraling Increase’

“Significant increases in public-sector compensation and a considerably tighter jobs market threaten the emergence of a spiraling increase of wages and inflation,” they wrote.

Russian real wages grew 11.4 percent in December, the fastest in more than three years, and rose 9 percent in January. The economy contracted 0.1 percent in January on a seasonally adjusted basis from the previous month, the Economy Ministry said on its website Feb. 24.

Gross domestic product may miss the government’s 3.7 percent growth forecast this year after beating the 2011 target by growing 4.3 percent, Deputy Economy Minister Andrei Klepach was cited as saying by RIA Novosti March 2. That may spur Bank Rossii to cut the refinancing and repo rates this month to jumpstart the economy, according to BNP Paribas.

“Growth is below potential, while inflation slowed more than expected,” Julia Tsepliaeva, head of research at BNP Paribas in Moscow, said yesterday by e-mail. “The problem of growth looks sharper than inflation.”

Capital Outflows

Policy makers will also be reluctant to reduce rates because it may intensify capital flight by making returns on ruble assets relatively less attractive. Net private capital outflows surged to $84.2 billion last year, the second highest total since the central bank began keeping records in 1994.

Ulyukayev said January outflows may have been $11 billion, while Klepach estimated them at $17 billion. The amount of cash leaving Russia probably eased in February, according to HSBC Holdings Plc.

“Although the intensity of capital outflows decreased, the outflows remain significant, supporting the current hawkish stance of monetary authorities,” Alexander Morozov, chief economist for Russia at HSBC, said in a note yesterday. “The central bank still appears very concerned.”

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