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Russia Inflation Probably Slowed in March From 18-Month High

Russian consumer-price growth probably slowed in March from the fastest pace in 18 months, adding pressure on the central bank to heed calls from the government to cut borrowing costs.

The inflation rate fell to 7.2 percent after 7.3 percent in February, the highest rate since August 2011, according to the median estimate of 21 economists in a Bloomberg survey. Prices probably rose 0.5 percent from the previous month, another poll showed. The Federal Statistics Service in Moscow is set to release the data at 4 p.m. today.

Bank Rossii may lower its main interest rates before inflation decelerates to within its target range, outgoing Chairman Sergey Ignatiev said yesterday. Rising alcohol, transport and food costs have spurred growth. Policy makers cut the cost of some less-used credit instruments this week, in what he said was the “first decision” toward monetary easing.

“Inflation may decelerate to 6.5 percent in June if nothing serious happens in the global economy,” Vladimir Tikhomirov, chief economist at Otkritie Financial Corp. in Moscow, said by phone today. “The central bank may lower rates as soon as May, or definitely in June, expecting inflation to slow in the second half.”

‘Seriously Concerned’

The Russian economy expanded 2.1 percent in the fourth quarter from a year earlier, the slowest pace since a recession in 2009. Ignatiev said yesterday that he was “seriously concerned” with the deceleration of growth, which he said was continuing with a 1.5 percent drop in industrial production in January and February from a year earlier.

The ruble has weakened 5.9 percent against the dollar since Feb. 1, when it reached 29.86, its strongest level in eight months.

Elvira Nabiullina, Putin’s former economy minister and current aide, is poised to take over monetary policy in June, when Ignatiev’s third and final term expires.

Weaker lending to companies presents a “huge challenge” to the country’s financial industry, Nabiullina said in speech yesterday. Bank Rossii “can’t compensate for all of the market sources of financing of the banking system,” she said.

Rates Held

The central bank this week kept the benchmark reference rate at 8.25 percent for a seventh month. High rates are partially to blame for low investment, Finance Minister Anton Siluanov said yesterday.

Deputy Economy Minister Andrei Klepach called for stimulus measures in an interview on Russian state television on April 1, saying the economy of the largest energy exporter is growing more slowly than the government’s 2.8 percent “conservative” estimate for 2013. This compares with the 5 percent growth target set by Prime Minister Dmitry Medvedev.

Central bank Deputy Chairman Sergey Shvetsov sparred with Klepach at a conference last week over whether lower rates would boost the slowing economy.

Inflation is seen falling to the central bank’s target range of 5 percent to 6 percent in the fourth quarter, Shvetsov said today at a conference in Moscow.

The rate was 7.2 percent as of March 25, Ignatiev said yesterday. The annual rate of consumer-price growth has surged from 6.6 percent in December, with increases in alcohol and transport costs adding to the effect that last year’s drought had on food prices.

‘Entirely Realistic’

A decline in grain prices, which began in February and will probably continue for the coming months, is an important factor and reining in inflation by the end of the year is “entirely realistic,” Ignatiev said.

“Given that the harvest was bad already in 2012, the chances are that we’ll see food price deflation in August-September,” Sanna Kurronen, an economist with Danske Bank A/S in Helsinki, said on April 2. “I’m expecting annual inflation to drop clearly starting in July when the base effect eases.”

Consumer-price growth will slow to 6.8 percent by the end of the first half and to 5.9 percent by the end of 2013, according to the median estimate of 36 analysts in a Bloomberg survey between March 22 and March 27.

Weak Growth

Bank Rossii will cut rates by 25 basis points or 0.25 percentage point, in the second quarter, with the refinancing rate falling to 7.5 percent by next year, the poll showed.

The central bank on April 2 cut rates on loans backed with gold and non-market collateral, and costs of some longer-term repurchase operations by a quarter point, while also dropping last month’s phrase that current market rates were acceptable.

Nabiullina’s arrival at Bank Rossii may make rate cuts more probable, Vladimir Osakovskiy, chief economist for Russia at Bank of America Merrill Lynch, told Bloomberg Television in an interview yesterday.

“The central bank in general will be much more dovish with her as a governor but we think the central bank will start cutting rates even before she will become the next governor,” Osakovkiy said. “With such weak growth and as inflation seems to already have peaked, we think the central bank might already start cutting rates in May or in June.”

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