Russian Inflation Probably Quickened to Fastest in 18 Months

Russian inflation probably accelerated in February to the fastest pace in 18 months, adding to arguments for the central bank to leave interest rates unchanged.

Consumer prices rose 7.3 percent from a year earlier after 7.1 percent in January, according to the median estimate of 21 economists surveyed by Bloomberg. Prices rose 0.6 percent from the previous month, a second poll of 17 economists showed. The Federal Statistics Service in Moscow will report the data today or tomorrow.

Policy makers are contending with price growth breaching their 5 percent to 6 percent target range for a sixth month as economic growth stutters at less than half of the 5 percent pace that Prime Minister Dmitry Medvedev seeks for Russia. President Vladimir Putin said Jan. 31 borrowing costs “substantially” higher than inflation were a source of concern, weeks before the central bank kept rates unchanged for a fifth month.

“A fast rise in food expenses, higher excise taxes and transport costs are putting increased pressure” on headline inflation, Maria Pomelnikova, an analyst with ZAO Raiffeisenbank in Moscow, said by e-mail before the data release. “But these are consequences of one-time effects. Core inflation isn’t accelerating, which gives hope that improved anti-inflation policies of the central bank are bearing fruit.”

Alcohol, Transport

The ruble weakened 1.8 percent last month against the dollar, its worst performance since May. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell three basis points to 187, according to JPMorgan Chase & Co. indexes. The difference compares with 176 for debt of similarly-rated Mexico and 173 for Brazil.

Inflation is surging after the government raised costs for items including alcohol and transport. Price growth may remain above the bank’s target range in the first half and output remains near full capacity, the central bank said Feb. 12 in a statement accompanying its rate decision.

Bank Rossii Chairman Sergey Ignatiev, whose third and final term ends in June, said Feb. 15 that he “hopes” inflation will start to slow in the coming months and with slower price growth rate cuts are “possible.”

Putin’s Candidates

The central bank is forecast to cut rates 25 basis points in the third quarter, according to the median estimate of 17 analysts in a Bloomberg survey. Traders are betting on 18 basis points of reductions in September compared with little change by June, forward-rate agreements tracked by Bloomberg show.

Putin must name a candidate to replace Ignatiev, 65, three months before his term ends in June. Bank Rossii First Deputy Chairman Alexey Ulyukayev, former Finance Minister Alexei Kudrin and VTB24 President Mikhail Zadornov were among those being considered for the post, three officials with knowledge of the discussions said in January.

A majority of Russians ranked fast price growth alongside problems in housing and utilities as their main concern, according to a poll published Jan. 31 by the state-run All-Russian Center for the Study of Public Opinion.

February’s core inflation, which excludes volatile costs such as energy, is projected to remain at 0.5 percent in the month, according to the median estimate of 10 economists surveyed by Bloomberg.

Necessary Cuts

“Rate cuts are necessary in the current situation,” Vladimir Osakovskiy, chief economist at Bank of America Merill Lynch in Moscow, said by telephone yesterday. “Core inflation shows that inflationary pressure is low. We expect that with inflation slowing down in April or May, the central bank may start to cut rates.”

Risks to economic growth have increased, Deputy Economy Minister Andrei Klepach said Feb. 25. Russian seasonally adjusted gross domestic product fell 0.3 percent in January from the previous month, the first decline since March 2012, he said.

In February, services PMI rose to 56.1 compared with 55.7 in January, the first increase in four months, HSBC Holdings Plc said today in an e-mailed statement, citing data compiled by London-based Markit Economics. The manufacturing Purchasing Manager’s Index was unchanged at 52. A reading above 50 indicates an improvement in business conditions, while a result below that suggests a deterioration.

“Given the quite robust PMI one can note contradictions with official data on a slowing of economic growth in Russia,” Dmitry Savchenko, an analyst at Nordea Bank AB in Moscow, said today in an e-mailed research note. “Ambiguous data will make the central bank’s decision more complicated.”

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