Russia to Hold Rates as Slump Sets Stage for 2013 Easing

Russia, the biggest emerging economy to raise interest rates in 2012, will probably leave borrowing costs unchanged and begin laying the groundwork for the first round of monetary easing in a year.

Bank Rossii will keep the refinancing rate at 8.25 percent at a Dec. 10 meeting in Moscow, according to 19 of 20 economists in a Bloomberg survey. One predicts 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.

Economists are downgrading their growth projections for the world’s biggest energy exporter as economic expansion slows to the weakest since a recovery began at the start of 2010. The effects of a poor harvest are wearing off, keeping inflation steady during the past two months and underscoring the case for a reduction in borrowing costs in the first half of 2013.

“I don’t rule out seeing a statement that the central bank may be preparing to lower rates next year,” Alexander Morozov, chief economist for Russia at HSBC Holdings Plc in Moscow, said by phone yesterday. “I expect them to hit a neutral note, saying that the level of rates is completely appropriate to the economic situation and inflation risks.”

Investors switched to betting on lower interest rates in November for the first time in six months. Three-month borrowing costs may fall 27 basis points, or 0.27 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. That compares with a jump of as much as 54 basis points forecast on May 17.

Unexpected Increase

Russia unexpectedly raised its main rates in September as inflation breached the 6 percent upper limit of the central bank’s target range after the poor crop fanned prices. Policy makers now want to hold inflation to less than 7 percent this year, according to central bank Chairman Sergei Ignatiev, whose third and last term ends next year.

Bank Rossii will deliver a rate decrease by the end of the second quarter next year after holding borrowing costs in the first three months of 2013, a separate Bloomberg poll showed. The refinancing rate will fall to 8 percent by the end of June 2013, a quarter-point above the record low, according to the median estimate of nine economists in a Bloomberg survey.

‘Proactive’ Stance?

“The main factors include a lack of inflation pressure and slowing economic growth,” Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch in Moscow, said by phone yesterday. “Our official forecast is for a reduction in the second quarter, when inflation will begin to slow in annual terms, but we don’t rule out that rates may be cut earlier if the central bank decides to be proactive.”

Consumer-price growth unexpectedly held steady at 6.5 percent from a year earlier in November after slowing the previous month. Core inflation, which excludes volatile costs such as energy, eased to 0.5 percent in the month from 0.6 percent in October.

Even so, more Russians are concerned with inflation than with corruption and bureaucracy, listing it among the country’s biggest problems behind housing and utilities, low living standards and drug and alcohol abuse, according to a poll published by the state-run All-Russian Center for the Study of Public Opinion on Nov. 16.

‘One-Off Effects’

“The one-off effects of a poor harvest and utilities tariff hikes do not require any further responses from the central bank,” Jacob Nell and Alina Slyusarchuk, economists at Morgan Stanley, said in a research note yesterday.

The cost to fix floating interest payments in rubles for a year using rate swaps was 7.34 percent today, compared with 7.53 percent before last month’s rate meeting, data compiled by Bloomberg show.

Russia’s short-term ruble-denominated bonds fell, sending yields on bills due in six months up by as much as 19 basis points to 6.1494 percent as of 1:10 p.m., according to an index compiled by the Moscow Exchange. A close at that level would be the highest since Nov. 14, according to data compiled by Bloomberg.

A faltering economic outlook supports the case for monetary tightening to end. Gross domestic product grew 2.3 percent from a year earlier in October, decelerating for a fifth month. GDP expanded 2.9 percent last quarter compared with the same period a year earlier, slowing from 4 percent in the previous three months.

The economy will expand 3.5 percent next year after advancing 3.6 percent in 2012, according to the median estimates of 35 economists in a Bloomberg survey.

“There’s no reason to expect substantial monetary risks at the end of the year,” Natalia Orlova, chief economist at Alfa Bank, said by phone yesterday. “Inflation dynamics in November undoubtedly show that the central bank was right when it didn’t increase rates last month.”

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