Russia Holds Key Rate on Inflation Risks as Growth Stalls

Russia’s central bank refrained from cutting interest rates after a surprise acceleration in consumer-price growth threatened efforts to hold inflation to within this year’s target range.

The one-week auction rate, the benchmark introduced two months ago, was kept at 5.5 percent at a meeting today, the central bank in Moscow said in a website statement. That matched the forecasts of all 24 economists in a Bloomberg survey. For a second month, Bank Rossii refrained from offering guidance on whether it sees money-market rates as appropriate.

Faced with quickening inflation for the first time in five months, policy makers led by Elvira Nabiullina chose to extend a pause on interest rates held since an increase in September 2012. The reluctance to cut leaves Russia, ensnared in its worst slowdown in four years, apart from European central banks moving to keep borrowing costs low to support their economies.

“The central bank is essentially saying that nothing has changed in its assessment of risks to growth and from inflation,” Vladimir Kolychev, chief economist for Russia at VTB Capital in Moscow, said by telephone. Policy makers “are leaving themselves flexibility” on the monetary-policy outlook by not offering guidance on money-market rates, he said.

Ruble, FRAs

The ruble remained weaker against the dollar after the statement, depreciating 0.9 percent to 32.7160 as of 7:20 p.m. in Moscow. The Micex Index of 50 stocks slid 1.3 percent to 1,489.55

The three-month MosPrime rate, which large Moscow banks say they charge one another, may drop 13 basis points, or 0.13 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. The spread is up from a four-month low of 7 basis points on Nov. 5.

Consumer prices may rise 6.2 percent to 6.3 percent in November from a year earlier, the Economy Ministry said today, faster than previously forecast. The Federal Statistics Service said inflation accelerated to 6.3 percent in October, exceeding all 22 forecasts in a Bloomberg survey.

The faster inflation was caused by “non-monetary factors, including a rise in prices for fruits and vegetables, which was unusual for this season,” as well as higher costs for some animal-based goods, the central bank said in the statement. The factors should have a “short-term” effect.

Independence, Credibility

“The statement mentioned explicitly that the Russian central bank’s inflation forecasts will play a role in guiding monetary policy decisions going forward and this was the first mention of this,” Clemens Grafe and Andrew Matheny, analysts at Goldman Sachs in Moscow, said in e-mailed comments. “Making these forecasts independent is an important step toward solidifying the market’s perception of the central bank’s independence and credibility.”

While economic growth remains sluggish, the central bank doesn’t forecast a “substantial widening” in the output gap, a measure of the difference between actual and potential gross domestic product, according to the statement.

The economy is growing at “slightly below its potential level,” amid weak investment and a slow recovery in external demand, policy makers said.

GDP will probably expand 2 percent next year, 2.5 percent in 2015 and 3 percent the following year, the central bank said in updated three-year monetary-policy guidelines published on its website today. Net capital outflows are seen at $55 billion this year, according to the report.

Investment, Consumer

Fixed-capital investment may grow 3 percent to 3.8 percent in 2014-2016, with consumer demand remaining the primary driver of economic growth, according to the regulator. Spending by households on final consumption is estimated to grow 4 percent to 4.4 percent a year during the period, the central bank forecast.

Bank Rossii removed from its monthly commentary on rate policy a forecast that inflation would fall into this year’s 5 percent to 6 percent range. That was one of the few significant changes in the statement, according to ING Groep NV’s chief Russia economist, Dmitry Polevoy, who said policy makers are probably signaling “readiness” for the price goal to be missed.

The central bank is still discussing the appropriate level for the long-term inflation target after seeking to reduce consumer-price growth to 4 percent in 2014-2016, Igor Dmitriev, head of Bank Rossii’s monetary-policy department, said at a conference in Moscow yesterday.

Longer Term

Rate policy will be tied to “how we see the longer-term development” of inflation rather than current trends, he said.

While Russia’s keeping rates steady, other central banks in the region have been easing borrowing costs to shore up their economies. Hungary reduced borrowing costs for a 15th month in October, while Poland pledged this week to keep its main rate at a record low until at least July 2014.

The European Central Bank cut its benchmark interest rate to a record low yesterday after a drop in inflation to the slowest pace in four years. The Czech monetary authority yesterday approved the first koruna sales in more than a decade to ease policy.

The Russian central bank is trying to ensure inflation stays on a lower trajectory in the long term even as the government warns that the country’s share in the global economy will be eroded during the next two decades by slower-than-average growth.

GDP will probably grow at an average pace of 2.5 percent until 2030, Economy Minister Alexei Ulyukayev, a former central banker, told reporters in Moscow yesterday. The economy grew 1.2 percent from a year earlier in the second quarter, the worst result since the last three months of 2009.

“The government should be the one stimulating the economy, not the central bank,” Oleg Popov, who manages $1 billion in Russian equities for Allianz Investments, said by phone in Moscow. “The central bank’s key role right now is limiting the scope of inflation growth, and so far they’ve been moderating it quite well.”

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