Russia Holds Rates as Nabiullina Moves to Target CPI
Russia’s central bank, which extended its interest-rate pause to a year, will introduce a single policy rate as part of its shift to inflation targeting.
Bank Rossii will use the one-week auction rate for providing or absorbing liquidity, currently at 5.5 percent, to signal its monetary-policy stance, according to a statement on its website, published after a meeting in Moscow today. It also pledged to hold quarterly floating-rate auctions and will offer three-month loans backed by non-marketable assets starting with a 500 billion-ruble ($15 billion) offering on Oct. 14.
Policy makers led by Chairman Elvira Nabiullina, who took over as central bank chairman in June, are completing their transition to targeting inflation by 2015 by fine-tuning policy and streamlining the bank’s main rates. Consumer-price growth above this year’s target of 5 percent to 6 percent has handcuffed the regulator’s ability to deploy monetary stimulus and boost an economy growing at its weakest pace since 2009.
“Inflation remains above the target corridor,” Nabiullina told reporters after the announcement, elaborating on today’s decision. “Inflation expectations are steadily not increasing, but they remain at a high level. Our task is to lower inflation expectations.”
The likelihood is “strong” that borrowing costs will be kept unchanged at the next policy meeting on Oct. 14 if current trends and outlook are sustained, Nabiullina said.
The three-month MosPrime rate, which large Moscow banks say they charge one another, may drop 36 basis points, or 0.36 percentage point, in the next three months, forward-rate agreements tracked by Bloomberg show. That compares with an increase of 15 basis points indicated March 27.
Bank Rossii has spurned calls from senior government officials to ease policy, holding its main lending rates for a 12th month today. Commercial banks took 61 percent, or 306.8 billion rubles, at its debut auction in July for one-year funds using non-marketable assets as collateral.
Providing three-month financing at the auction announced today will “free up market collateral for operations on the money market for banks and thereby improve the effectiveness of our transmission mechanism,” Nabiullina said. The parameters of the new auction were made after a review of the last offering, she said.
The new three-month refinancing tool, to be offered at the minimum rate of 5.75 percent, is the “key policy decision today,” Dmitry Polevoy, chief economist for Russia and CIS at ING Groep in Moscow, said in e-mailed comments, adding that the MosPrime rate will “continue drifting lower” as a result. “The new three-month auction will likely be the most-demanded one, making 12-month auctions redundant under similar costs.
The central bank, which estimates inflation will slow to 5 percent to 6 percent by year-end, said consumer-price growth decelerated to 6.3 percent from a year earlier as of Sept. 9. Threats to economic growth in the medium term are related to weak investment and the sluggish recovery of external demand, according to the statement.
‘‘Considering current domestic and external trends, the level of market interest rates is seen as appropriate in the nearest future to achieve a balance between inflation risks and risks of low economic growth,’’ the bank said.
The new key rate now stands at 5.5 percent after the one-week auction deposit rate was raised to that level from 5 percent, with the one-week auction-based repurchase rate kept at 5.5 percent. The central bank also reduced the cost of overnight facilities secured by non-marketable assets to 6.5 percent from 6.75 percent, while the rate on overnight loans was cut to 6.5 percent from 8.25 percent.
The one-day rates on lending facilities and the central bank’s fixed deposit operations overnight represent the upper and lower bounds of the interest-rate corridor, whose width is set at 2 percentage points, according to the statement. Changes in the key rate will lead to automatic and symmetrical shifts in the rate corridor, the bank said.
The corridor’s ‘‘width is considered as optimal for limiting money market interest rates volatility while providing incentives for interbank market activity,” policy makers said.
The refinancing rate, which was held at 8.25 percent today, will be brought to the level of the new key rate by Jan. 1, 2016, according to the statement.
To help the central bank rein in inflation, the Economy Ministry has proposed a freeze on regulated prices for natural gas, power and rail in 2014, a measure opposed by state companies such as OAO Russian Railways and backed by President Vladimir Putin at a budget meeting Sept. 11.
The central bank wants to hold inflation to 4.5 percent next year, which would represent a “rather serious slowdown” in price growth, Nabiullina said. Considering the decision on limiting utility tariffs, the inflation target may be achieved “without excessive tightening” of monetary policy, she said.
If tariffs are frozen, the ministry may increase its 2014 economic-growth forecast to 3 percent from 2.8 percent, with industrial output and investment projected to expand 2.2 percent and 3.9 percent, respectively, Economy Minister Alexei Ulyukayev said Sept. 11.
Gross domestic product will rise 1.8 percent this year, the Economy Ministry said last month, trimming its April forecast for a 2.4 percent advance. The economy grew 1.2 percent from a year earlier in the second quarter, the worst result since the last three months of 2009.
The central bank estimates Russia’s potential growth rate at about 2 percent to 2.5 percent, Nabiullina said.
“To increase the pace of economic growth, we need an increase in labor productivity, and monetary stimulus will hardly be sufficiently effective here,” she said. Given the small output gap and high inflation expectations, there are “grounds to keep interest rates on the main operations at the current level.”
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