Russia Seen Holding Rates as Inflation Tops Growth Worry

Russia will probably leave interest rates unchanged for a seventh month as inflation holds more than a percentage point above above the central bank’s target range.

The refinancing rate will remain at 8.25 percent when policy makers meet in Moscow on April 2, according to 17 of 21 economists in a Bloomberg survey. Four forecast a quarter-point cut. The overnight and one-week auction-based repurchase rates, the main instruments used to provide banks with cash, will be held at 5.5 percent and the deposit rate will stay at 4.5 percent, two other surveys showed.

Inflation that reached an 18-month peak is hamstringing a move by policy makers to use monetary stimulus to lift an economy expanding at the weakest pace since 2009. Chairman Sergey Ignatiev, whose final term ends in June, has said he’d consider cutting rates once inflation falls as the government considers widening the regulator’s mandate to promote economic growth.

“As far as easing, I think it’s more likely to spur inflation than growth,” Sergey Shvetsov, a deputy chairman of the central bank, said today in Moscow at a conference organized by the Vedomosti newspaper. Russian corporate loan rates, adjusted for inflation, are comparable with European borrowing costs at about 3 percent, he said.

The average rate on ruble-denominated loans to companies was 10.2 percent in February, up from 10 percent a month earlier and a 2012 low of 9.2 percent, central bank data show. Inflation accelerated to 7.3 percent in February from a year earlier.


Three-month borrowing costs may rise three basis points, or 0.03 percentage point, in the next three months, down from an increase of as much as 15 basis points on March 27, according to forward-rate agreements tracked by Bloomberg. The ruble added 0.2 percent to 31.0245 against the dollar.

Yields calculated based on non-deliverable ruble forwards today showed one-month rates tumbling 36 basis points since March 19 to 6.28 percent as of 5:10 p.m. in Moscow. The ruble advanced for the first time in three days against the dollar, appreciating 0.2 percent to 31.0350.

The central bank left all rates unchanged for a sixth month on March 15, saying inflation remained at 7.3 percent in early March -- unchanged from February. It also cited factors including a surge in food costs and prices regulated by the state. The economy continues to show some signs of deceleration, the regulator said.

Not Justified

“I’m not of the opinion that there has been any urgent information over the past two weeks that would justify a rate cut,” Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow, said by phone yesterday. “If you’re confident that you’re right in your position, then hold your line: When inflation is high, we’re not going to cut.”

The government and lawmakers are studying the possibility of expanding the central bank’s mandate to include some responsibility for ensuring economic growth, President Vladimir Putin’s spokesman, Dmitry Peskov, said March 27.

The discussions follow Putin’s March 12 nomination of his aide Elvira Nabiullina, a former economy minister, to replace Ignatiev, with lawmakers scheduled to resume hearings on the nomination April 3.

Her appointment has triggered speculation that monetary policy will be loosened after officials including Deputy Economy Minister Andrei Klepach sought lower borrowing costs to revive growth in what First Deputy Premier Igor Shuvalov called a “huge argument” between the government and policy makers.

Shvetsov, Klepach

Speaking at the Moscow conference today, Shvetsov squared off against Klepach on the virtues of harnessing monetary stimulus to unlock economic growth. Klepach said faster expansion is impossible without easing and policy adjustment by the central bank. Shvetsov rebutted the arguments, pointing to the role of government-regulated utility tariffs in fanning price growth and the risk premiums as a result of Russia’s weak judiciary system.

“The central bank is already making its contribution to economic growth,” Shvetsov said. “And it’s clear that it’s the government that’s responsible for economic growth and we are helping the government, within our purview.”

Slowing Growth

The second board meeting in less than three weeks comes after the Economy Ministry said March 21 that gross domestic product expanded 0.1 percent from a year earlier in February. The ministry projects inflation will end March at 7.2 percent from a year earlier. The statistics service is scheduled to publish the data April 4-5.

The central bank wants to keep inflation at 5 percent to 6 percent this year, a range it was forced to abandon last year.

“The fact that the central bank is holding its rates meeting before the publication of the inflation data sends the signal that it’s not so important,” said Vladimir Osakovskiy, chief economist for Russia at Bank of America Merrill Lynch in Moscow. “As soon as inflation starts to slow -- and that will be clear in April or May -- the central bank will start to cut rates.”

The central bank is convening earlier in April than previously this year, when it held meetings near mid-month. The decision prompted Alfa Bank, Russia’s largest non-state lender, to predict the regulator would move forward a quarter-point rate cut, chief economist Natalia Orlova said in a note to clients April 27.

The earlier date was selected because of the need for a quorum as some board members will be traveling abroad later in the month, Shvetsov told reporters today.

Political Pressure

“The chances for a rate cut are probably not as high as the market thought, given the comments from Shvetsov this morning,” Vladimir Kolychev, head of research at Societe Generale SA’s OAO Rosbank unit in Moscow, said in a phone interview. “Now it really feels as if they’re trying to push back.” A cut now, while “much needed given the state of the economy, will be seen by most of the market and households as the central bank giving up to the government.”

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