Russia Pauses Rate Increases as Downturn Risk Brushed Off

Russia’s central bank held back from raising interest rates after a surprise increase last month, a pause that may prove brief after inflation quickened past the target range to the fastest in 10 months.

Bank Rossii kept the refinancing rate at 8.25 percent at a meeting today after a quarter-point increase in September, the central bank in Moscow said in a statement on its website. The decision was forecast by 19 of 22 economists in a Bloomberg survey. The main short-term lending and deposit rates will remain at 5.5 percent and 4.25 percent.

Economists project the central bank will raise borrowing costs again before the end of 2012 after inflation surged to 6.6 percent in September. Policy makers said in today’s statement they don’t see risks of a “significant slowdown” to the economy from monetary tightening, another indication the bank is preparing further action to curtail price growth.

“The central bank decided to take a pause and see how the situation with inflation will develop,” said Vladimir Tikhomirov, chief economist at Otkritie Capital in Moscow. “The risk of an economic slowdown is there, even though the central bank is less concerned with economic growth.”

The ruble appreciated 0.4 percent to 30.9427 per dollar as of 5:53 p.m. in Moscow, heading for the strongest close since Sept. 17. The Micex Index of 30 stocks was 1.8 percent higher at 1,482.26.

Food, Tariffs

Russia, the only major emerging economy to raise interest rates this year, is struggling to keep a lid on prices after droughts in the U.S. and locally drove up food costs. The government’s top priority is fighting inflation, even at the expense of short-term growth, President Vladimir Putin said Oct. 2 at an investment conference in Moscow.

Consumer prices rose 6.6 percent in September from a year earlier, led by the cost of bread, meat and alcohol, exceeding the median forecast of 6.5 percent in a Bloomberg survey, the Federal Statistics Service said yesterday.

“The acceleration of inflation in recent months is linked primarily to the pace of growth of food costs and increases in regulated prices and tariffs,” Bank Rossii said in the statement. Lending growth and low unemployment “create the conditions to support stable domestic demand.”

Selling Grain

Prime Minister Dmitry Medvedev said at a government meeting yesterday that the state should begin selling grain from stockpiles to stabilize supplies on the domestic market. The decision is attempting to blunt the effect of an “extremely meager harvest” in Russia, said Jenia Ustinova, an analyst at Eurasia Group in Washington.

“The government is definitely grappling with how to best rein in inflation,” she said by e-mail. “The decision to start grain interventions is probably at least in part linked to that effort.”

The central bank’s bias toward tighter monetary policy contradicts their acknowledgment that consumer-price growth is driven by food and regulated tariffs, said Vladimir Miklashevsky, a Helsinki-based economist at Danske Bank A/S.

Political Pressure

“Bank Rossii is indicating they are ready to hike again during the fourth quarter,” he said in an e-mailed response to questions. “They also realize true reasons for inflation and its non-monetary character, but Bank Rossii is under political pressure to act.”

The world’s largest energy exporter will probably grow 3.5 percent this year, less than the 4.3 percent pace in the previous two years, according to the Economy Ministry. Retail sales, a measure of the household consumption that accounts for about half the Russian economy, advanced 4.3 percent in August, the weakest level in 29 months.

“We’re seeing a slowdown, not just in agriculture, but also in consumption and investment,” Anton Struchenevsky, an economist at OAO Sberbank’s investment banking unit in Moscow, said by telephone. “The lack of monetary factors of inflation and slowing growth created the conditions for leaving rates.”

Inflation Target

Bank Rossii is now targeting an inflation range of 5 percent to 6 percent for next year, the same as for 2012 and a half-point higher than the earlier target, according to a medium-term monetary-policy strategy published yesterday. Policy makers will seek to contain consumer-price growth at 4 percent to 5 percent in 2014 and 2015.

Central bank First Deputy Chairman Alexei Ulyukayev said Oct. 2 that inflation risks remain greater than the threat of an economic slowdown.

“The central bank roughly knew what inflation would be in September, so it raised rates,” said Julia Tsepliaeva, head of research at BNP Paribas in Moscow, said by telephone.“That was three weeks ago, and raising again after just three weeks would be foolish.”

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