Russia Holds Rates as Nabiullina Sees Growing Economic Risks

Russia left its main lending rates unchanged for an 11th month with inflation above target while signaling increased concern about economic growth.

Bank Rossii kept the refinancing rate at 8.25 percent at a meeting in Moscow today, the regulator said on its website. That matched forecasts by 12 of 20 economists in a Bloomberg survey, with eight predicting a quarter-point cut. The main lending and deposit rates were also left unchanged.

Elvira Nabiullina, 49, who took over as central bank chairman in June, is deferring rate reductions as the ruble’s six-month slide against the dollar threatens to spill over into inflation pressures. Price growth decelerated in July to an eight-month low of 6.5 percent from a year earlier and remained at that level as of Aug. 5, the central bank said, adding the economy is operating “somewhat below” its potential.

“The central bank’s statement has generally become more dovish,” Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow, said by phone. “In the past, the central bank noted continued risks of an economic slowdown, while now it’s saying significant risks.”

Bank Rossii reiterated that inflation will probably drop to within its target range of 5 percent to 6 percent by year-end under current monetary policy and barring external food shocks. Policy makers also said consumer-price growth would continue to slow in 2014.

Surprise Deceleration

Gross domestic product expanded 1.2 percent in the second quarter from a year earlier, down from 1.6 percent in the first quarter, the Federal Statistics Service in Moscow said in a report today. That missed all 19 estimates in a Bloomberg survey, which had a median estimate of 2 percent growth.

The ruble pared losses after the decision before weakening 0.2 percent against the dollar to 32.8975 as of 4:04 p.m. in Moscow. Russia’s ruble-denominated debt due February 2027 fell for the first time in three days, increasing the yield five basis points, or 0.05 percentage point, to 7.7 percent.

“Achieving medium-term inflation targets will also require a strengthening in the positive trends in inflation expectations,” policy makers said today.

Unemployment has “increased somewhat” in recent months as industrial output remains low and investment continues to contract, according to the statement.

The euro-area recession and slower growth in China have weighed on Russia’s $1.9 trillion economy through weaker demand for exported commodities.

New Auction

While keeping its main rates unchanged at last month’s meeting, policy makers announced a new one-year auction, with a rate tied to the one-week auction-based repurchase rate. Banks took 306.8 billion rubles ($9.3 billion), or 61 percent of the offered 500 billion rubles, at the minimum rate of 5.75 percent.

The central bank didn’t comment on the new auction in today’s statement or announce plans to hold another.

President Vladimir Putin’s government last month approved a plan to stimulate the economy, including measures to reduce the cost of loans to small and medium-sized businesses. Nabiullina helped draft the measures as Putin’s chief economic aide before moving to the central bank.

While reducing inflation is the “main criterion” to bring down loan costs, it’s not enough, Nabiullina said in a meeting with Putin on July 24. Consumer-price growth may slow to 6.4 percent in August, the Economy Ministry said in an e-mailed report today.

Easing Ahead

Economists projected one quarter-point cut to the overnight auction-based repurchase rate in the third quarter, followed by another in the final three months of the year, according to a Bloomberg survey.

“Inflation has slowed since the last meeting to just 6.5 percent from 6.6 percent, while the ruble remains under pressure,” Dmitry Dorofeev, a trader and analyst at BCS Financial Group in Moscow, said by e-mail. “That’s why the central bank continues to remain in a waiting mode even as business activity in Russia slows.”

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