Nabiullina Holds Russian Rates While Offering New Cash

Russia’s central bank left its main interest rates unchanged at Elvira Nabiullina’s first policy meeting as chairman and introduced a new loan facility to improve lenders’ access to cash.

The refinancing rate will remain at 8.25 percent, the central bank in Moscow said on its website today. That matched the forecasts of 15 of 22 economists in a Bloomberg survey, with seven predicting a cut. Bank Rossii introduced a one-year floating-rate facility with a starting cost of 5.75 percent, compared with its 7.5 percent fixed-rate similar maturity loans.

Nabiullina, a former economy minister, became the first female central bank governor in the Group of Eight as corporate leaders and politicians urged monetary stimulus for a slowing economy. She is continuing a course set by predecessor Sergey Ignatiev, who eased policy by lowering longer-term rates while keeping the refinancing rate unchanged since September 2012.

“The effect of introducing the floating rate will be greater than lowering the main rates by 25 basis points because it may result in a sharp drop in money market rates” Maxim Oreshkin, chief economist for Russia at VTB Capital in Moscow, said by telephone. “The central bank has taken its biggest step yet in this monetary easing cycle.”

The ruble traded 0.4 percent weaker at 37.2284 against the central bank’s target basket as of 3:01 p.m in Moscow. The Micex Index of 50 stocks added 2 percent to 1,394.83.

Inflation Slows

Ignatiev, 65, had said consumer-price growth would need to slow further before Bank Rossii would cut its main policy rates. Inflation decelerated to 6.6 percent from a year earlier as of July 8 from June’s pace of 6.9 percent, according to the statement. The Economy Ministry said today that price growth may slow to 6.5 percent this month.

Bank Rossii sees inflation falling back into this year’s target range of 5 percent to 6 percent in the second half given “the current direction of monetary policy and barring negative food-price shocks,” according to the statement.

Faster inflation in major emerging economies is undermining economic growth and fueling social unrest, pushing central banks in countries including Brazil and Indonesia to increase borrowing costs this month.

Russians see inflation as the second-biggest challenge facing the country behind issues in housing and utilities, according to a poll published yesterday by the state-run VTsIOM research center.

Inflation Expectations

Inflation expectations continued to ease in May and June, according to a survey published by Bank Rossii yesterday. Economists surveyed last month forecast the overnight auction-based repurchase rate would be cut a quarter point in the third quarter followed by a similar move in the fourth quarter.

Bank Rossii will offer 500 billion rubles ($15.3 billion) on July 29 at the first 12-month auction using the floating-rate loan backed by non-marketable assets, the regulator said in a second statement. The rate on the funds will be linked to the central bank’s main one-week lending rate.

“Conducting long-term operations with a floating rate will allow for increased precision in sending monetary-policy signals,” according to the statement. Central bank changes to short-term interest rates will now feed through to the costs for earlier-issued longer term loans.

The new instrument effectively means Bank Rossii cut one-year borrowing costs by as much as 175 basis points from 7.5 percent on the current one-year facility backed by the same assets, Vladimir Osakovskiy, chief economist for Russia at Bank of America Merrill Lynch in Moscow, said in a note to clients.

‘Drastic’ Reduction

The “drastic” reduction should “attract considerable interest,” he said. Bank Rossii said at a recent meeting that it had registered as much as 1 trillion rubles in eligible collateral.

The government is also seeking to roll out a series of measures intended to reduce corporate borrowing costs. The Finance Ministry estimates the measures may reduce loan rates for low-risk borrowers by 2 percentage points if fully implemented.

Nabiullina helped develop those plans as Putin’s chief economic aide before moving to the central bank on June 24.

“Bank Rossii will continue to monitor inflation risks and risks of an economic slowdown,” policy makers said in the rate-decision statement. “Under the conditions of weak investment activity and a slow recovery in foreign demand, risks remain of the Russian economy slowing.”

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