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Russia to Delay Rate Cuts as Inflation Curbs Ignatiev Easing

Russia to Delay Rate Cuts as Inflation Curbs Ignatiev Easing
Bank Rossii, Russia's central bank, is targeting a range of 5 percent to 6 percent for consumer-price growth this year after overshooting the goal in 2012 to finish at 6.6 percent. Photographer: Andrey Rudakov/Bloomberg

Russia will probably refrain from lowering interest rates this month as faster inflation deflects the central bank’s attention from the flagging economy.

Bank Rossii will hold the refinancing rate at 8.25 percent for an eighth month at a meeting in Moscow tomorrow, according to 18 of 24 economists in a Bloomberg survey. Six forecast a quarter-point cut. The main lending and deposit rates will also be kept unchanged, two separate surveys showed.

Russian central bank head Sergey Ignatiev, whose third and final term ends June 24, hands over an economy that’s expanding at its slowest pace since a 2009 recession and experiencing inflation more than a percentage point above target. As officials from India to Israel ease monetary policy to recharge growth, his successor, President Vladimir Putin’s economic aide Elvira Nabiullina, is helping prepare a plan to revive the economy that may be presented to the government this week.

“Inflation is still going to prevail over everything else,” Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow, said yesterday by phone. “We’re not expecting any change in rates since inflation accelerated to 7.2 percent in April and there was actually a slight improvement in macro data for March.”

Investor bets are pricing in a reduction in rates. The three-month MosPrime rate, which large Moscow banks say they charge one another, may drop 34 basis points, or 0.34 percentage point, in the next three months, according to forward rate agreements tracked by Bloomberg. That compares with an increase of 15 basis points forecast at the end of March.

Economy Cools

Economic growth slowed to 2.1 percent in the fourth quarter from a year earlier. The Economy Ministry last month lowered its forecast for gross domestic product to expand this year by 2.4 percent, down from a projected 3.7 percent increase in an outlook published in September.

Still, in a sign household demand may help shore up the economy, retail sales grew faster than forecast in March and unemployment unexpectedly fell to 5.7 percent from 5.8 percent. Real disposable incomes surged 8.3 percent in March from a year earlier, with real wages growing 4.2 percent.

Consumer prices advanced 7.2 percent in April from a year earlier, faster than March’s 7 percent increase, the Federal Statistics Service said last week. While the increase was forecast by economists, it limits any potential rate cuts for Ignatiev, who’s said Bank Rossii would wait to see a sustained slowdown in inflation before cutting borrowing costs.

Inflation Expectations

Russians’ inflation expectations “fell significantly” since December, the central bank said today, citing a survey of 2,000 people conducted March 25-April 1. The regulator said in its April 2 decision to hold key rates that the inflation rate would drop back into the target range in the second half.

Given the lag for monetary-policy decisions to have an effect on the broader economy, the central bank may want to pay less attention to the short-term acceleration in price growth and start cutting rates sooner, according to Evgeny Nadorshin, chief economist at AFK Sistema, a Moscow-based investment company with assets ranging from telecommunications to oil.

“Lately the central bank has been articulating fairly clearly that it’s ready to reduce rates,” Nadorshin said by phone. “Publishing the results of a poll showing a drop in inflationary expectations on the eve of the rates meeting should be seen as the central bank offering the market yet another argument as to why it will cut rates.”

Missing Target

Bank Rossii is targeting a range of 5 percent to 6 percent for consumer-price growth this year after overshooting the goal in 2012 to finish at 6.6 percent. Inflation will gradually slow this year and is “likely” to return to the target range by year-end, Bank Rossii said yesterday in a quarterly report on monetary policy.

Central banks overseeing about a quarter of the world’s economic output have cut interest rates this month, spanning the globe from the euro area and Australia to Kenya and Sri Lanka. Russia is the biggest emerging economy to raise borrowing costs in 2012, having increased all interest rates in September.

Bank Rossii will probably cite “fairly high” risks to the pace of economic growth while noting that inflation is projected to slow in the medium term, said Artem Arkhipov, chief economist for Russia at ZAO UniCredit Bank in Moscow, who forecasts a quarter-point cut.

Delayed Cuts

“Still, they may use the April inflation data published last week as a sort of excuse to push back a cut by one month,” he said.

The central bank’s overnight and one-week auction-based repurchase rates, the main instruments used to provide banks with cash, will be held at 5.5 percent and the deposit rate will stay at 4.5 percent, two surveys showed.

The cost to fix floating payments in rubles for a year using interest-rate swaps has tumbled 47 basis points since the end of 2012 to 6.92 percent, according to data compiled by Bloomberg.

Policy makers reduced some longer-term rates, including for loans backed by non-marketable assets and gold, at their meeting on April 2. The move brings longer-term rates closer to short-term costs to borrow from the central bank, which will make changes to key policy rates have a more pronounced effect on broader borrowing costs in the economy, the central bank said yesterday in a report.

‘Largely Justified’

The amount of rubles held at the central bank on deposits and correspondent accounts, a measure of liquidity in the banking system, fell to 691 billion rubles ($22 billion) yesterday, the lowest in five months, according to data compiled by Bloomberg. The measure advanced to 953 billion rubles today, near the 50-day moving average, according to data compiled by Bloomberg.

Russia’s tight monetary policy is “largely justified” as policy makers attempt to rein in price growth, Putin said during a live televised call-in show April 25. Ignatiev has called April’s cuts a “first decision” toward easing.

“They should cut rates because economic growth is extremely low right now for a country like Russia, and because inflation is going to be falling in the second half of the year,” Ivan Tchakarov, chief economist for Russia at Renaissance Capital in Moscow, said in a telephone interview. “If they don’t cut this time, they should 100 percent cut next month.”

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