Russia Holds Rates as Slumping Economy Sets Stage to EaseScott Rose and Olga Tanas
Russia left borrowing costs unchanged this month and dropped a phrase that money-market rates are acceptable for the “nearest future,” a sign interest rates may be cut as early as next month to bolster growth.
Bank Rossii held the refinancing rate at 8.25 percent for a fourth month, the Moscow-based central bank said in a statement on its website today. The decision was forecast by all 19 economists in a Bloomberg survey. The overnight and one-week repurchase rates used to provide banks with cash were kept at 5.5 percent and the overnight deposit rate was held at 4.5 percent, also in line with forecasts.
Chairman Sergey Ignatiev, whose final term expires in June, is fine-tuning the bank’s interest-rate outlook as the economy slows to the weakest pace since a recovery began in 2010 and policy makers from Poland to Israel lower borrowing costs to jumpstart expansion. Inflation in Russia quickened to 6.8 percent from a year earlier as of Jan. 9, up from 6.6 percent in December, the central bank said.
“The main surprise was that they removed the phrase,” Maxim Oreshkin, chief economist for Russia at VTB Capital in Moscow, said by phone. “Still, I don’t expect any changes to key rates at the February meeting, although they may change lesser rates like they did with currency swaps in December.”
Policy makers last month reduced the cost to swap foreign currency in rubles by a quarter point to 6.5 percent while also raising the amount it pays on overnight deposits to 4.5 percent. Bank Rossii said the move was “neutral” for monetary policy. Economists said the easing effects of the cheaper swaps outweighed the less-used deposit rate.
Russia’s one-year government bond yields tumbled five basis points to 5.835 percent as of 12:30 p.m. in Moscow, according to an index compiled by the Moscow Exchange. A close at that level would be the lowest since Sept. 23, 2011. The ruble appreciated 0.2 percent to 30.1895 per dollar as of 12:32 p.m. The Micex Index of 50 stocks held losses and was 0.5 percent lower at 1,521.62.
Policy makers dropped wording used in last month’s statement that money market rates were at an acceptable level for the “nearest future.” The phrase is understood by the market to mean no change at the next meeting, First Deputy Chairman Alexey Ulyukayev said in an interview to Interfax last month.
Data releases for November suggested the economy continued to cool gradually, with industrial output and retail trade stabilizing at “low” growth levels and investment slowing, Bank Rossii said in the statement. The labor market and credit expansion remain supportive of domestic demand, according to the statement.
“The decision was made based on an assessment of inflation risks and the prospects for economic growth,” the central bank said. The next meeting is planned for the first half of February, according to the statement.
Price growth quickened to 6.6 percent in December from a year earlier after remaining at 6.5 percent in the previous two months. The central bank wants to hold inflation at 5 percent to 6 percent this year, a target range it was forced to abandon last year.
The December increase was driven by food prices and passenger transport costs, while price-growth for non-food items “remained measured,” Bank Rossii said in the statement.
President Vladimir Putin, who won re-election to a third term last year, said Dec. 12 that working further to contain price growth remains a top priority and may take precedence over short-term growth.
The threat of inflation was ranked alongside low living standards as the second-biggest problem facing the country, according to a Jan. 9 poll published by the state-run All-Russian Center for the Study of Public Opinion.
Economic growth slowed to 2.9 percent in the third quarter compared with a year ago, down from 4.9 percent in the first quarter. The expansion probably decelerated further in the final three months of 2012, with gross domestic product expanding just 2.5 percent, according to the median estimate of 14 economists in a Bloomberg survey.
“The central bank dropped the phrase about rates being acceptable because it’s preparing conditions to ease monetary policy,” Maria Pomelnikova, an analyst at ZAO Raiffeisenbank in Moscow, said by phone. “But this doesn’t mean a rate cut will happen at the meetings in February or March. We wouldn’t expect any measures before the second quarter.”