Russia to Refrain From Rates Cut as Prices Spook Ignatiev

Russia will probably refrain from changing interest rates after outgoing central bank Chairman Sergey Ignatiev signaled concern that a surge in inflation may drive expectations for more price growth.

Bank Rossii in Moscow will hold the refinancing rate at 8.25 percent for a ninth month at its June 10 meeting, according to 22 of 26 economists in a Bloomberg survey. Four forecast a quarter-point cut. The main lending and deposit rates will also be kept unchanged, two separate surveys showed.

Ignatiev, who will preside over his last policy meeting after leading the regulator for more than a decade, has signaled that he would leave the first reductions to Russia’s main lending rates since 2011 to his successor, Elvira Nabiullina, who becomes chairman June 24. While Russia’s weak economy means the central bank is moving toward cutting rates, an acceleration of inflation in May and low unemployment suggest the regulator should wait, he said June 5.

“It would of course be pretty tough to cut the refinancing rate or the repo rate given the acceleration in inflation and the central bank’s policy actions,” Maxim Oreshkin, chief economist for Russia at VTB Capital in Moscow, said June 6 by phone. Policy makers will probably have a decision resembling the last two, when they lowered some longer-term rates a quarter point, he said.

Forecast Change

Ignatiev in April said the reductions represented the “first decision” toward monetary easing. He highlighted conflicting economic data in his June 5 speech as an obstacle to monetary stimulus, prompting three of the economists polled by Bloomberg to forecast no change in borrowing costs after earlier predicting a cut.

Investor bets are also pricing in a smaller reduction in rates. The three-month MosPrime rate, which large Moscow banks say they charge one another, may drop 9 basis points, or 0.09 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. That compares with 49 basis points on May 22, the most since October 2009.

The ruble depreciated 0.7 percent against the dollar to 32.33 as of 12:33 p.m. in Moscow. Russian government ruble-denominated bonds due in 2027 fell for a third day, increasing the yield one basis point to 7.63 percent.

Bank Rossii may leave all of its interest rates unchanged or it may cut some of them at the June 10 meeting, Ignatiev said in his speech. Longer-term rates such as those backed by non-marketable assets and gold, may have scope for another reduction by 25 basis points, Ignatiev said at a press conference after the speech.

Not Simple

“The decision won’t be simple because the situation in the economy isn’t that simple,” Ignatiev said. “Some economic indicators count in favor of one decision, others support another.”

Neighboring Belarus yesterday cut its benchmark interest rate to 23.5 percent in its fourth reduction this year as Serbia’s central bank unexpectedly lowered its benchmark to 11 percent. Elsewhere in eastern Europe, Poland and Hungary cut rates to record lows in the past two weeks, while the Czech central bank is considering currency sales with rates at effectively zero.

Bank of England policy makers yesterday maintained stimulus for the economy after Governor Mervyn King concluded his last policy meeting, holding their target for bond purchases at 375 billion pounds ($584 billion).

Global Stimulus

Bank Rossii has been unable to join global central banks in providing monetary stimulus to flagging economies as accelerating inflation kept policy makers in Moscow on their toes. That undercut any designs to help economic growth in Russia, the world’s largest energy exporter, even as expansion slowed to an annual 1.6 percent in the first quarter, the weakest pace since a contraction in 2009.

Consumer prices rose 7.4 percent from a year earlier in May, more than forecast in a Bloomberg survey and the most since August 2011. The rate may return to this year’s target range of 5 percent to 6 percent in September or October, supported by easing food prices from a better harvest, according to Ignatiev.

Lending to companies and households increased 19 percent through May 1 from a year earlier, Ignatiev said. In real terms, the advance was 11 percent, which is “much faster” than economic growth, suggesting the pace of lending isn’t weighing on the expansion, he said.

Detailed Guidance

Ignatiev gave “unusually specific and detailed guidance” before this month’s rate meeting, Jacob Nell and Alina Slyusarchuk, economists at Morgan Stanley, said in a June 6 research note. Policy makers will probably hold the main rates until September and may make another cut to longer-term rates before Nabiullina becomes chairman, they said.

“The central bank would be unlikely to take any unexpected or controversial decisions -- such as cutting rates when inflation is rising –- in advance of her arrival,” Nell and Slyusarchuk said.

The central bank has held the overnight and one-week repurchase rates, the main tools used to provide banks with cash, at 5.5 percent since September, when they were raised a quarter point.

Economists forecast the repo rate will drop by half a point to 5 percent by the end of the third quarter and then remain on hold to the end of the year, according to the median estimate of 12 economists in a Bloomberg survey.

“The central bank is making clear and transparent hints that it will start to cut rates, but not Monday,” said Vladimir Tikhomirov, chief economist for Russia at Otkritie Financial Corp. “The central bank will cut its main rates in July, when it will be obvious that inflation is slowing.”

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