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Russia Set to Skip Rate Increase on Inflation Surprise

Russia, the largest emerging economy to raise interest rates this year, will probably refrain from increasing borrowing costs today after inflation unexpectedly slowed in October for the first time in six months.

Bank Rossii will leave the refinancing rate at 8.25 percent at a meeting in Moscow, half a percentage point above the record low, according to 21 of 23 economists in a Bloomberg survey. Two predict a quarter-point increase. Policy makers will hold their main short-term lending and deposit rates at 5.5 percent and 4.25 percent, two separate surveys showed.

Russia raised its refinancing rate for the first time in 16 months in September as a surge in price growth pushed inflation beyond the 6 percent upper limit of the regulator’s target range. Chairman Sergei Ignatiev, whose third and final term at the helm of Bank Rossii ends in 2013, needs to check price gains next year as the economy slows and his counterparts from Poland to the Philippines reduce borrowing costs.

“October showed that inflation expectations are easing, and that inflation is slowing after the earlier surge,” Oleg Vyugin, chairman of MDM Bank and a former Bank Rossii first deputy chairman, said in a telephone interview. “There’s no reason to touch rates.”

Three-month borrowing costs may fall 2 basis points, or 0.02 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. That compares with a jump of 21 basis points forecast on Oct. 4, the day before Bank Rossii’s last rate meeting. The cost to fix floating interest payments in rubles for a year using rate swaps was 7.53 percent yesterday.

Inflation Surprise

Price growth unexpectedly slowed to 6.5 percent from a year earlier in October, the Federal Statistics Service said Nov. 6. Core inflation, which excludes volatile costs such as energy, decelerated for a first time on a monthly basis since May.

Most Russians named rising prices as their biggest concern, topping corruption, poverty and drug abuse, in an August poll published by the Moscow-based Levada Center. Inflation slowed to a post-Soviet low of 3.6 percent in April and May after the government pushed back increases in utility tariffs by six months to July 1.

“We’re more surprised that we’re seeing less core inflation than we would have expected,” said Clemens Grafe, chief economist at Goldman Sachs Group Inc. in Moscow. “We see far less wage pressure developing than we would have expected, but I think it’s too early really to be complacent on that.”

Slower core inflation may convince Bank Rossii to hold rates because it’s an indicator of the monetary pressure behind rising prices, analysts at ZAO Raiffeisenbank in Moscow wrote in a research note yesterday.

Market Strains

“There’s rising tension on the money market, which is already experiencing a sort of monetary tightening as short-term interest rates exceed the central bank’s lowest refinancing rate by almost 1 percentage point,” they said.

The Ruonia overnight rate, a weighted average for ruble deposits among banks, rose to 6.46 percent on Oct. 31, the highest since June, easing to 5.82 percent yesterday according to data compiled by Bloomberg.

Policy makers want to hold inflation at 5 percent to 6 percent next year, half a percentage point higher than previously targeted, after conceding consumer-price growth breached that range in 2012.

Ruble, Outflows

Capital outflows and the central bank’s policy of allowing a more flexible ruble are helping reduce the role of money supply in driving up prices, said Vladimir Pantyushin, chief economist for Russia and the CIS at Barclays Plc’s investment-banking unit in Moscow. Food now accounts for about 40 percent of Russian inflation and will recede as a factor next year, he said.

“We see a big correlation between global and Russian food prices, and globally there is a contraction,” he said. “There was a burst that stabilized in June and now we see the rollback.”

Russia’s M2, the broadest measure of money supply, grew 14.8 percent in September, the slowest since November 2009, according to data compiled by Bloomberg.

The economy grew 2.8 percent in the third quarter, down from a 4.5 percent pace in the first half of the year, Deputy Economy Minister Andrei Klepach said last month.

Even so, Russia was the only emerging market to show improvements in both the manufacturing and services purchasing managers’ indexes last month, according to Goldman’s Grafe. He forecasts a quarter-point increase in all rates this week as policy makers focus on meeting next year’s inflation goal.

Deposit Rate

The central bank may also raise the overnight deposit rate alone, which would help it assert control over short-term interest rates by setting a higher floor, said Maxim Oreshkin, chief economist at VTB Capital in Moscow.

“The central bank has repeatedly said it thinks the current interest rates corridor is too large,” he said. “Increasing the deposit rate wouldn’t really influence market money rates at the moment, but it would show the central bank is moving toward narrowing the corridor and continues to take inflation seriously.”

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