Russian Rate Debate Flares Up as Cabinet Seeks Growth

Russia’s government clashed with the central bank over its reluctance to stimulate the country’s sagging economy, with President Vladimir Putin urging an evaluation of both fiscal and monetary measures to boost growth.

Bank Rossii has “all the necessary grounds” to signal a future cut in borrowing costs, Finance Minister Anton Siluanov said yesterday and Deputy Economy Minister Andrei Klepach said monetary stimulus was “essential.” Easing policy would be “counterproductive,” said Alexey Ulyukayev, the central bank’s first deputy chairman.

“We should analyze whether we have really exhausted these measures’ potential in this situation, or whether, given the European recession, it still makes sense to keep doing something to stimulate demand using budget or monetary-policy measures,” Putin said in Moscow yesterday.

Economic growth in the largest energy exporter has decelerated to the weakest pace since a recovery began in 2010 as weakening demand from China and Europe hurts exports. The slump is challenging Bank Rossii Chairman Sergey Ignatiev, whose final term expires in June.

The benchmark Micex Index traded 0.4 percent higher at 1,521.16 at 2:21 p.m. in Moscow. The ruble was little changed at 30.3005 per dollar against the dollar and slid 0.4 percent to 40.4595 against the euro. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble at 30.7140 in three months.

Dropped Phrase

The central bank on Jan. 15 removed a reference to interest rates being adequate, a move that preceded the rate increase in September when Bank Rossii became the biggest emerging-market regulator to increase borrowing costs last year.

Policy makers on Jan. 15 removed a reference to interest rates being adequate for the “nearest future” from the statement following a decision to keep borrowing costs unchanged for a fourth month. The central bank left the refinancing rate at 8.25 percent, the overnight and one-week repurchase rates used to provide banks with cash stayed at 5.5 percent and the overnight deposit rate remained at 4.5 percent.

The change in the wording split economists, with banks including Morgan Stanley saying monetary tightening may follow, while a Bloomberg survey and contracts used to speculate on three-month borrowing costs point to lower rates this year.

Free Hand

Bank Rossii now has a free hand to raise or lower borrowing costs at its next board meeting in February, Ulyukayev said. A slowdown in Russia’s corporate lending growth since September shouldn’t be blamed on higher rates the central bank set that month, Bank Rossii First Deputy Chairman Alexei Simanovsky said today. While companies complain they’re being charged too much for credit, banks counter they can’t find enough reliable borrowers, he said.

Assuring stable economic growth of 5 percent is the government’s top priority in the coming years, Prime Minister Dmitry Medvedev said yesterday. Gross domestic product rose about 3.5 percent in 2012 from a year earlier, according Klepach. The government projects 3.6 percent expansion this year.

“We think that Russia has definitely exhausted its potential to grow further through private consumption and should start to invest heavily and efficiently,” Vladimir Miklashevsky, an economist at Danske Bank A/S in Helsinki, said by e-mail. “The government should have been asking such questions a couple of years ago already.”

Economy Slumps

Slowing economic growth at the end of the year, reflected in industrial output, investment and agriculture, may be caused not only by the global economy, Putin said. December’s inflation rate of 6.6 percent was “very low,” especially when compared with an average 12.75 percent in 2000-2010, Putin said.

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.

“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 Jan. 15 statement.

Investor Expectations

Investors, who switched to betting on lower interest rates in November for the first time in six months, are now pricing in 17 basis points, or 0.17 percentage point, of rate cuts 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.

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.

“Such relative hawkishness of the central bank might be an effort to counter massive pressure for easing, which is coming from the government and the president,” Vladimir Osakovskiy, Bank of America Merrill Lynch’s chief economist in Moscow, said by e-mail yesterday. “We still think that the central bank will start to cut rates sooner rather than later, possibly from March or the second quarter as economy is very weak and inflation is not a major problem.”

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