Russia to Hold Off on Rate Increase on One-Time Effects
Russia’s central bank will probably refrain from raising interest rates today even after signaling a potential increase this month as policy makers wait to see if a weak harvest will drive prices in the longer term.
Bank Rossii’s main refinancing rate will remain at 8 percent, a quarter-point above the record low, according to 18 of 19 economists in a Bloomberg survey. Two other surveys showed larger minorities predicting quarter-point increases to the overnight auction-based repurchase rate and the overnight deposit rate.
Russia, the only major emerging economy that hasn’t lowered borrowing costs in 2012, is considering an increase in interest rates as consumer-price growth nears this year’s target of 6 percent. The inflation picture is clouded by non-monetary factors such as prospects for a below-par harvest, said Maxim Oreshkin, chief economist at VTB Capital in Moscow.
“We’re forecasting no change to rates, but tough wording in the decision,” he said by e-mail yesterday. Policy makers will need to tighten policy this year as the simultaneous effect of a weak ruble, rising tariffs and higher food costs may push inflation expectations higher.’’
Bank Rossii last month widened the ruble’s trading corridor to 7 rubles against the target basket of dollars and euros from 6 rubles and lowered the amount of currency purchases required to move the band. The move, following two similar steps last year, was intended to make rate policy more effective in fighting inflation, the central bank said in a statement July 24.
The ruble has appreciated 3.4 percent against the dollar since the decision. It ended trading in Moscow yesterday 0.4 percent weaker at 31.6698 per dollar. Russian ruble debt has returned 6.9 percent so far this, trailing a 16.5 percent rise for Brazil and more than returns in China and India, according to JPMorgan Chase & Co. (JPM) EMBIG indexes.
Interbank lending rates may ease by 21 basis points, or 0.21 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. Bank Rossii has left borrowing costs unchanged since December, when it lowered the refinancing rate by a quarter-point and raised the deposit rate by the same amount.
The central bank removed wording from last month’s monetary-policy statement saying that money market rates were adequate for the “coming months,” replacing the phrase with “nearest future.”
Inflation risks are rising while dangers to economic growth are falling, Alexey Ulyukayev, the central bank’s first deputy chairman responsible for monetary policy, told the Izvestia newspaper in an interview published July 19.
“We’re leaving ourselves the option to change rates at the next board meeting,” Ulyukayev said, according to the Moscow-based newspaper.
Consumer-price growth accelerated to 5.6 percent in July from a year earlier, the fastest this year and up from 4.3 percent in June. The increase was driven by the government’s decision to delay annual increases of utility costs to July 1 as well as by rising food prices. That “will likely provoke some deliberation of a rate hike,” said Vladimir Pantyushin, chief economist at Barclays Plc’s investment banking unit in Moscow.
“The monetary-policy lag is around 12 months and, therefore, a move tomorrow would be unlikely to affect this year’s inflation,” Pantyushin said in a note to clients. “Factors pushing inflation higher -- global food prices and regulated utility tariffs -- are beyond the central bank’s control.”
Droughts that damaged crops in regions ranging from the U.S. to Russia helped drive up global food costs 6.2 percent last month, the most since 2009 in July, according to the United Nations’ Food & Agricultural Organization.
After a similar global food-price shock in 2010, policy makers began raising borrowing costs in February 2011 amid signs domestic demand was improving, Vladimir Tikhomirov, chief economist at Otkritie Capital in Moscow, said in a note to clients yesterday, adding that policy makers may raise the deposit rate to “re-balance” interest-rate tools after allowing greater ruble flexibility last month.
“A persistent 30 percent increase in wheat prices could add around 1.5 percentage points to headline inflation in 2012, with a subsequent increase later in 2013,” Tikhomirov said. “The question is what the central bank will do to maintain its credibility.”
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