Russia Rate Wording Pits Morgan Stanley Against Easing Calls

Russia’s central bank removed a reference to interest rates being adequate, pitting banks including Morgan Stanley against market consensus in predicting an increase in borrowing costs.

Policy makers dropped a phrase that money-market rates are acceptable for the “nearest future” in a statement on yesterday’s decision to leave the refinancing rate at 8.25 percent for a fourth month. While a Bloomberg survey and contracts used to speculate on three-month borrowing costs point to lower rates later this year, the last time this language disappeared, interest rates were raised the next month.

Central bank Chairman Sergey Ignatiev is fine-tuning the regulator’s interest-rate outlook after economic expansion slowed to the weakest pace since a recovery began in 2010 and inflation accelerated further beyond the regulator’s goal. Bank Rossii now has a free hand to raise or lower borrowing costs at the next board meeting in February, Alexey Ulyukayev, a first deputy chairman of the central bank, said today.

“Non-food and core inflation will rise further in the first half, and this will prompt a hike,” Jacob Nell, an economist at Morgan Stanley in Moscow, said yesterday by e-mail. “I’ll wait to see inflation data before being more specific about timing.”

Investor Bets

Investors, who switched to betting on lower interest rates in November for the first time in six months, are now pricing in 24 basis points, or 0.24 percentage point, cut in rates over the next three months, according to forward-rate agreements tracked by Bloomberg. That’s down from 35 basis points the day before the rates meeting in December and compares with a jump of as much as 54 basis points forecast on May 17.

President Vladimir Putin said Dec. 12 that work to refrain price growth may take priority over short-term growth. Speaking at a televised government meeting in Moscow today, Putin said the economy’s slowdown late last year was a “cause of concern” and demanded further analysis of any additional fiscal or monetary stimulus that Russia may still deploy to shore up demand.

Russian equities dropped for a second day, with the 50-stock Micex Index losing 0.4 percent to 1,509.48 by 3:49 p.m. in Moscow after falling 0.9 percent yesterday. The ruble was little changed at 30.3350 per dollar.

Imbalances, Risks

“Softening monetary policy by lowering rates or deploying additional elements of quantitative easing would be counterproductive” because Russia’s economic growth is near its potential, Ulyukayev said. “That’s likely to produce new imbalances, new risks for different segments of the economy.”

November data 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 its statement. Gross domestic product rose 2.9 percent from a year earlier in the third quarter of 2012, compared with 4.9 percent in the first.

Prime Minister Dmitry Medvedev said today that assuring stable economic growth of 5 percent is the government’s top priority in the coming years. GDP gained about 3.5 percent in 2012 from a year earlier, according to Deputy Economy Minister Andrei Klepach. The government projects 3.6 percent expansion this year.

Rates Held

As well as keeping the refinancing rate flat, meeting the forecasts of all 19 economists surveyed by Bloomberg, Bank Rossii left the overnight repurchasing rate that’s used to provide banks with liquidity at 5.5 percent and the deposit rate at 4.5 percent, also in line with forecasts.

It last removed the “nearest future” wording from its statement in August before raising the refinancing rate a quarter-point the following month, becoming the biggest emerging-market central bank to increase borrowing costs in 2012.

Price growth quickened to 6.6 percent from a year earlier in December after remaining at 6.5 percent the previous two months and stood at 6.8 percent as of Jan. 9. Consumer prices may rise more than 0.5 percent in January from the previous month, Klepach said today.

The central bank wants to hold inflation at 5 percent to 6 percent this year, a range it was forced to abandon last year. Price growth may slow to within the target band in the second quarter, Ulyukayev said.

‘Measured’ Growth

December’s increase was driven by food prices and passenger transport costs, while price-growth for non-food items “remained measured,” Bank Rossii said. Inflation remaining above target may influence economic expectations and cause inflation risk, it said.

“I expected, and expect, rates will be raised in the first quarter if inflation exceeds 7 percent,” Julia Tsepliaeva, chief economist at BNP Paribas, said by e-mail. “If inflation is below this level, rates will be kept unchanged.

Market consensus suggests policy makers’ next move will be to reduce borrowing costs. Bank Rossii will cut rates in the second quarter after leaving them unchanged in the first, according to a Bloomberg survey of 10 economists. The cost to fix floating interest payments in rubles for a year using rate swaps is 7.2987 percent today, down from last year’s high of 7.81 percent on July 9, data compiled by Bloomberg show.

Top government officials including Klepach and Finance Minister Anton Siluanov today joined calls for more easing. Monetary stimulus is ‘‘essential,” as loan rates charged by commercial banks are choking economic expansion, Klepach said.

Lower Rates

“Now there’s all the necessary grounds to expect lower rates,” Siluanov said in an interview. September’s rate increase has “served its purpose,” he said.

The central bank is preparing the ground “to cut policy rates to accommodate a soft patch in the economy and generally contained inflation,” said Ivan Tchakarov, chief economist at Renaissance Capital in Moscow.

Yaroslav Lissovolik, head of research at Deutsche Bank AG in Moscow, predicts monetary policy will be eased in the spring.

Nevertheless, the change in the central bank’s policy statement has injected an element of uncertainty into its future direction on borrowing costs, particularly in light of the heightened inflation pressure, according to Alexander Morozov, chief economist at HSBC Holdings Plc in Moscow.

“Dropping the words about the policy rates’ adequacy to the current macroeconomic stance speaks about increasing chances of a rate hike than a rate cut,” he wrote yesterday in an e-mailed note, though he predicts the regulator won’t raise rates. “The purpose of the central bank’s comments is to calm down market expectations about an early rate cut already in the second quarter of this year.”

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