Russia Spurs Calls to Cut as Inflation Tops Economic Woes

Russia left its main interest rates unchanged for an eighth month, brushing off government calls for lower borrowing costs and repeating an incremental cut to seldom used rates after inflation accelerated last month.

Bank Rossii kept the refinancing rate at 8.25 percent, half a point above the record low, the Moscow-based regulator said in a statement on its website today. The move was forecast by 18 of 24 economists in a Bloomberg survey, with six predicting a quarter-point cut. The main lending and deposit rates were also kept unchanged.

Outgoing Bank Rossii Chairman Sergey Ignatiev has limited room for policy easing with inflation more than a percentage point above target, putting him at odds with an international push for monetary stimulus this month. As officials from Australia to Israel lower borrowing costs to recharge growth, his successor, President Vladimir Putin’s economic aide Elvira Nabiullina, is helping prepare a plan to revive an economy that’s expanding at the weakest pace since a 2009 contraction.

“The central bank is remaining very cautious,” Maxim Oreshkin, chief economist for Russia at VTB Capital in Moscow, said by phone. “Inflation clearly remains the central bank’s top priority.”

The ruble paired losses against the dollar following the announcement and was 0.5 percent weaker at 31.521 as of 5:20 p.m. in Moscow. The 50-stock Micex Index added to losses and was 1.3 percent lower at 1,287.28, heading for the lowest close since May 2.

Tight Policy

Some government members, including Economy Minister Andrei Belousov, have criticized Russia’s restrictive monetary policy, arguing that the economy may slide into a recession later this year without stimulus. Putin called the regulator’s stance “largely justified” last month in a televised show where he took questions from the public, saying the central bank needed to rein in inflation.

Gross domestic product grew 2.1 percent in the fourth quarter from a year earlier, the slowest pace since a 2009 contraction. The Economy Ministry last month lowered its forecast for gross domestic product to expand this year by 2.4 percent, down from a projected 3.7 percent increase in an outlook published in September.

Policy makers held their main lending rates, the overnight and one-week auction-based repurchase rates, at 5.50 percent, while the overnight deposit rate was kept at 4.50 percent. Costs on some longer-term loans, including those backed by gold and non-marketable assets, were reduced by a quarter-point for a second month.

Assessing Risks

“The decision was made based on an assessment of inflationary risks and the prospects for economic growth,” the central bank said in the statement. Moving the longer-term rates closer to the main policy tools will “strengthen the effectiveness of the interest rate channel’s transmission mechanism for monetary policy.”

Bank Rossii is targeting a range of 5 percent to 6 percent for consumer-price growth this year after overshooting the same goal in 2012 to finish at 6.6 percent. Inflation will gradually slow this year and is “likely” to return to the target range by year-end, Bank Rossii said in a quarterly report on monetary policy.

Still, Ignatiev called April’s reductions a “first decision” toward easing. Bank Rossii will wait to see a sustained slowdown in inflation before cutting the main borrowing costs, he said. The decreases applied to loans representing about one-fifth of the central bank’s refinancing operations, according to Credit Suisse Group AG.

‘Dovish’ Turn

“We believe that the decision to lower longer-term rates likely marks the start of a more dovish stance on the part of the monetary authorities, which may lead to further interest rate decreases this year to support growth,” Yaroslav Lissovolik, Moscow-based head of research at Deutsche Bank AG, said in an e-mailed note.

Inflation expectations among the public “fell significantly” since December, the central bank said yesterday, citing a survey of 2,000 people conducted March 25-April 1. Even so, consumer prices advanced 7.2 percent in April from a year earlier, faster than March’s 7 percent increase.

Policy makers’ assessment of the risks to growth and from inflation “looks like a copy-paste from April,” Dmitry Polevoy, chief economist for Russia at ING Groep NV, said in a note.

“The central bank sticks to its guns, resisting pressure from outside,” he said. “No change in the policy statement and the unchanged refinancing rate, which the central bank uses as a signaling tool for further policy moves, might indicate a chance for a similar outcome in June.”

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