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Russia Cuts Ruble Swap Rate in Pivot Toward Easing

Russia Unexpectedly Raises Deposit Rate, Cuts Ruble Swap Costs
A pedestrian walks through snow past the front of Russia's central bank in Moscow. Photographer: Andrey Rudakov/Bloomberg

Russia, the largest emerging economy to raise rates in 2012, took a step toward the first round of monetary easing in a year after the economy slowed and inflation stabilized.

Bank Rossii cut the cost to swap foreign currency into rubles by a quarter point to 6.5 percent, the Moscow-based central bank said in a statement on its website today. The regulator raised the deposit rate to 4.5 percent from 4.25 percent, effective tomorrow, and left its main lending rates unchanged, calling the moves “neutral” for monetary policy.

Central bank Chairman Sergei Ignatiev is moving to relax borrowing costs three months after increasing all 21 rates in his toolkit to fight the fastest inflation this year. Policy makers said money-market rates are “acceptable for the nearest future” for the first time since July.

“If anything, it’s probably more easing of monetary policy than tightening,” said Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch in Moscow. “Now the effective rate on the money market is 6.5 percent. When there’s a liquidity shortage, lowering the rate on swaps is more relevant to the market than raising deposit rates.”

Three-month borrowing costs may fall 37 basis points, or 0.37 percentage point, in the next three months, the biggest decline predicted by traders in more than three years, according to forward-rate agreements tracked by Bloomberg. That compares with a jump of as much as 54 basis points forecast on May 17.

Currency Swaps

Policy makers held the refinancing rate at 8.25 percent and the main short-term repurchase rates at 5.5 percent. The central bank last cut the rate on currency swaps from 8 percent in June, and First Deputy Chairman Alexey Ulyukayev said last month that the rate may be lowered again to offer liquidity when the ruble comes under pressure.

“This move won’t have any effect on rates in the nearest future, but it signals that volatility will decline in the long term,” Maxim Oreshkin, chief economist at VTB Capital in Moscow, said by phone. He correctly forecast the higher deposit rate, and predicted in a note this morning that Bank Rossii may cut the swap rate.

The amount of rubles held at the central bank on correspondent accounts and in deposits, and indicator of the amount of free cash held by banks, fell to 633 billion rubles ($20.6 billion) today, the central bank said. That’s the lowest level since Oct. 5, according to data compiled by Bloomberg.

Bank Rossii conducted $3.42 billion and 2.85 billion euros ($3.68 billion) in swaps for rubles in November, the central bank said in a statement today.

Helping Banks

“It’s most likely a weakening of monetary policy, since there’s more interest in the swaps,” Vladimir Pantyushin, chief economist at Barclays Plc’s investment-banking unit in Moscow, said by phone. “We’ll see that from medium-sized and small banks, which don’t have assets available for the repurchase market but do have foreign currency.”

The ruble appreciated 0.5 percent against the dollar to changed against the dollar to 30.7385 as of 5:43 p.m. in Moscow after trading little changed earlier today. Short-term borrowing costs pared increases, with six-month yields on Russian government bonds dipping from as high as 6.21 percent to 5.96 percent, according to an index compiled by the Moscow Exchange.

September Surprise

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

“There has been a stabilization of price growth in recent months for a broad range of goods and services,” the central bank said in the statement. “Growth rates for banking lending are stabilizing, however given that they remain at fairly elevated levels, the risks of a significant slowdown in the economy because of tightening monetary conditions are seen as insignificant.”

The economy is decelerating as consumer lending and real wages growth slows against the backdrop of a deteriorating external outlook, Deputy Economy Minister Andrei Klepach told reporters today in Moscow. The ministry now projects GDP will expand 3.6 percent next year, down from a forecast of 3.7 percent in August, he said.

“We expect the trend of slowing growth to be broken in the middle of next year, as long as there aren’t any major external shocks in the global economy,” Klepach said. “In that case, there should be some acceleration.”

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