Russia to Refrain From Rate Increase on Growth Concerns
Monetary-policy makers will hold the refinancing rate at 8 percent, a quarter-point above the record low, at a meeting tomorrow, according to 12 of 15 economists in a Bloomberg survey. Three forecast a quarter-point increase. The overnight auction-based repurchase rate and deposit rate will also be left unchanged, two separate surveys showed.
Growth in the world’s largest energy exporter slowed to 4 percent from a year earlier in the second quarter as China’s cooling expansion and Europe’s debt crisis sapped demand for Russian commodities exports. Inflation accelerated in August as droughts in the U.S. and Russia stoked food prices, threatening to push price growth beyond the central bank’s 6 percent target.
“Inflation is rising purely because of non-monetary factors,” said Ivan Tchakarov, chief economist at Moscow-based Renaissance Capital. “Raising rates in such an environment would take some heroic reasoning to justify.”
Forward-rate agreements used to bet on borrowing costs in the next three months show the three-month MosPrime interbank rate may rise 14 basis points, or 0.14 percentage point, to 7.25 percent, according to data compiled by Bloomberg.
The cost to fix floating interest payments in rubles for a year fell to 7.51 percent today, the lowest since June 11, from 7.72 percent at the start of the month.
Russia has held rates unchanged this year even as the other so-called BRIC economies -- Brazil, India and China -- have reduced borrowing costs to stimulate growth. Brazil lowered its benchmark Selic rate to a record 7.5 percent last month, while Chinese Premier Wen Jiabao said slowing inflation in his country offered policy makers room to bolster the economy after signs of weakening growth.
Economic expansion in Russia may cool to less than 3 percent on an annual basis in the second half, down from 4.5 percent in the first six months, as energy exports stagnate, Economy Minister Andrei Belousov told lawmakers in Moscow today.
“These are not the easiest times for financial markets, the situation with liquidity in the country and the impact on the real sector, industry,” German Gref, chief executive officer OAO Sberbank, Russia’s largest lender, told reporters today. “For the first time we’ve entered a period of positive interest rates.”
Russia’s growth will slow next year from 2012, said Gref, a former economy minister.
While Russia’s central bank kept the refinancing rate at 8 percent at its last meeting on Aug. 10, policy makers dropped wording in their statement that money-market rates were at an acceptable level for the “nearest future.”
The overnight MosPrime rate, which the biggest Moscow banks say they charge to lend to one another, fell to 5.25 percent yesterday from as high as 6.89 percent May 31.
Consumer prices advanced 5.9 percent from a year earlier in August, the biggest increase this year, as droughts from the U.S. to Russia damaged crops and drove up food prices. Bank Rossii is seeking to hold inflation at 5 percent to 6 percent this year before cutting that range by a half-point in each of the next two years.
Inflation will be “about” 6 percent, central bank Chairman Sergey Ignatiev told President Vladimir Putin at a government meeting in July.
Putin, who returned to the Kremlin for a third term in May, has touted last year’s record-low 6.1 percent inflation rate as a major economic success and told investors and foreign leaders at an Asia-Pacific Economic Cooperation summit last week that Russia would continue cutting inflation.
The government may resort to “alternative means” of subduing inflation without monetary-policy tightening, according to Jenia Ustinova, an analyst at Eurasia Group in Washington. The authorities may instead impose price caps or limit exports of grain in a bid to reverse the slump in approval ratings for Putin and Prime Minister Dmitry Medvedev, Ustinova said in an e-mailed report yesterday.
“Stagnating salaries and pensions, rising consumer prices, and higher unemployment may catalyze street action and even boost opposition performance at the regional and gubernatorial elections,” Ustinova said. “The current political and macroeconomic environment suggests the government is likely to consider using alternative means to stem inflation and thus avoid a potential tightening cycle. The authorities, for example, are likely to put pressure on retailers and producers of consumer goods, in particular focusing on food products.”
The central bank would only consider increasing rates this week because of political pressure to show action over quickening inflation, Vladimir Tikhomirov, chief economist at Otkritie Capital in Moscow, said by phone.
“Inflation is mostly from food prices, and raising rates wouldn’t do anything to solve that problem,” he said.
This year’s grain harvest will reach 70 million to 75 million tons, down from 94.2 million tons in 2011 because of drought, the Agriculture Ministry said in August.
“Worsening conditions on the global and Russian food markets, as well as forecasts for the main agricultural crops this year, are a significant source of inflation risks,” Bank Rossii said in the Aug. 10 statement.
Retail sales remain high, with consumer lending and low unemployment bolstering demand, while a worsening industry outlook wasn’t seen as showing broader risks to the economy, Bank Rossii said in its statement.
The inflation rate will probably advance to 6.5 percent in September and 6.7 percent by year-end, Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch in Moscow, said yesterday by phone. Still, the case for raising rates is weak because inflation stems from a weather-related supply shock on food prices and the economy is decelerating, he said.
“The economy is actually slowing quite fast,” Osakovskiy said. “Investment demand and liquidity demand from the real economy is slowing already.”
Russia’s gross domestic product may expand 3.5 percent this year, less than the 4.3 percent increase in the past two years, Deputy Economy Minister Andrei Klepach said last month. The economy grew 2.6 percent in July from a year earlier, according to a preliminary estimate from the ministry.
The ministry also raised its 2012 inflation forecast to 7 percent from 5 percent to 6 percent, Klepach said. Inflation may be 5 percent to 6 percent next year, a half-point more than the prior forecast and the central bank’s current target range.
“Whether the central bank continues fighting for its current target or adjusts it to reality is yet to be seen,” Dmitry Polevoy, chief economist for Russia and Kazakhstan at ING Groep NV in Moscow, said yesterday by e-mail. The government needs “realistic” forecasts for budget planning and other official purposes, he said.
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