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Russia Likely to Refrain From Cutting Key Rate on Inflation

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Bank Rossii
A Russian national flag flies above the headquarters of Bank Rossii, Russia's central bank, in Moscow. Bank Rossii estimates consumer-price growth will slow to its target by the end of the year. Photographer: Andrey Rudakov/Bloomberg

Oct. 11 (Bloomberg) -- Russia’s central bank will probably leave borrowing costs unchanged for a 13th month as inflation remains higher than its target.

Bank Rossii will hold the one-week auction rate, its new benchmark introduced last month, at 5.5 percent at the Oct. 14 meeting, according to all 22 economists in a Bloomberg survey. The decision will be announced Oct. 14 at 1:30 p.m. in Moscow.

Elvira Nabiullina, who became central bank chairman in June, is reluctant to cut borrowing costs with the inflation rate above this year’s target of 5 percent to 6 percent even after a drop last month. That has prevented the central bank from countering a slowdown in economic growth to the weakest pace since a 2009 contraction.

“There are risks that the drop in the inflation rate may pause or even reverse,” Vladimir Pantyushin, chief economist for Russia at Barclays Plc’s investment banking unit in Moscow, said by phone yesterday. “That’s the main reason for the central bank not to make any moves now.”

The ruble depreciated 5.5 percent against the dollar since the start of the year, the ninth-worst performance among 24 emerging-market currencies tracked by Bloomberg.

As a measure to provide banks with liquidity with the benchmark rate unchanged, the central bank will also offer 500 billion rubles ($15.5 billion) at an auction for three-month loans backed by non-marketable assets at a floating rate.

‘Good Demand’

“We expect good demand for the entire limit,” Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow, said in an e-mailed answer yesterday. “The need for liquidity remains and is growing as banks have near-record debt on repurchase agreements and collateral has depleted.”

While Russian policy makers have kept interest rates unchanged for a year, their counterparts in the largest emerging economies have started policy tightening to rein in inflation. India last month raised the benchmark repo rate a quarter-point to 7.50 percent, while Brazil this week increased the Selic rate by 50 basis points to 9.50 percent.

For Russians, consumer-price growth is one of the biggest concerns along with housing and utilities, according to a poll published Sept. 18 by the state-run All-Russian Center for the Study of Public Opinion.

‘Inflation Persistence’

Inflation slowed to 6.1 percent in September from 6.5 percent in August. Core inflation, which excludes volatile costs such as energy, remained at 5.5 percent. While Bank Rossii estimated consumer-price growth will slow to its target by the end of the year, the Economy Ministry today forecast the inflation rate will fall to 6 percent in October, according to an e-mailed report.

“We see signs of inflation persistence,” Jacob Nell and Alina Slyusarchuk, economists at Morgan Stanley, said in a research note yesterday.

Gross domestic product rose 1.2 percent from a year earlier in the second quarter, the worst result since the last three months of 2009. The Economy Ministry has estimated the economy will grow 1.8 percent this year and 3 percent in 2014.

Even with the slowing expansion, monetary easing isn’t the prescription as it wouldn’t have a “real effect” on economic growth, Nabiullina told lawmakers Oct. 8.

“All our monetary stimulus may lead to price growth and inflation, triggering a new round of increases for state monopoly tariffs and housing costs,” Nabiullina said. Low inflation “is necessary for an investment-oriented model of economic growth.”

To contact the reporter on this story: Olga Tanas in Moscow at otanas@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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