Morgan Stanley Sees Russia Raising Interest Rates Before Easing

Russia will increase interest rates in the first six months of 2013 before easing monetary policy in the second half as inflation slows to the central bank’s 5 percent to 6 percent target range, according to Morgan Stanley.

As core inflation, which excludes volatile costs such as energy, is set to exceed 6 percent in the first half, the central bank will raise borrowing costs by a quarter-point to “keep inflation expectations in check and maintain the credibility of its transition to inflation targeting,” Jacob Nell and Alina Slyusarchuk, economists at Morgan Stanley, said today in an e-mailed research note.

Bank Rossii Chairman Sergey Ignatiev, whose third and final term ends this year, failed to hold inflation below the 6 percent upper limit of the regulator’s target band last year, with price growth accelerating to 6.6 percent in December, up from 6.1 percent a year earlier.

Policy makers will cut rates “at least once” in the second half of the year, Nell and Slyusarchuk said, adding that the pace and timing of the moves will depend on the impact of July’s increases in utility tariffs and the grain harvest this year. The central bank will also expand the range in which it allows the ruble to trade against its target dollar-euro basket to 9 rubles from 7 rubles and reduce its levels of currency interventions, according to Morgan Stanley.

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