Russia Seen Holding Key Rate as Ruble Weakening Handcuffs PolicyOlga Tanas
Russia’s central bank will probably leave borrowing costs unchanged for a 17th month as the ruble’s record drop frustrates efforts to relax monetary policy.
Bank Rossii will keep its one-week auction rate, the benchmark introduced in September, at 5.5 percent at a meeting in Moscow today, according to all 22 economists surveyed by Bloomberg. Policy makers may raise the cost to swap foreign currency into rubles, Morgan Stanley said in a Feb. 7 note.
Boxed in by above-target inflation and the slowest economic growth since 2009, policy makers led by Chairman Elvira Nabiullina are having to contend with capital outflows from emerging markets after a pullback in U.S. monetary stimulus. The central bank, which is preparing to allow the Russian currency to trade freely by 2015, is struggling to contain consumer-price growth at no more than 5 percent this year after overshooting its 5 percent to 6 percent range in 2013.
“While the high inflation rate doesn’t allow the central bank to cut the rate, political signals in favor of lower lending rates for companies don’t allow an increase,” Vladimir Tikhomirov, chief economist at Otkritie Financial Corp. in Moscow, said by phone.
The three-month MosPrime rate, which large Moscow banks say they charge one another, may rise 38 basis points, or 0.38 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. That’s a reversal from 18 basis points of reductions seen on Dec. 12, a day before the central bank last reviewed interest rates.
The ruble has lost 6.5 percent this year against the dollar, according to data compiled by Bloomberg, the worst performer among 24 emerging-market currencies except for Argentina’s peso. The central bank, which sold $7.8 billion and 586 million euros ($802 million) in January to stem the ruble’s decline, said yesterday that its international reserves shrank $8.7 billion in the week ending Feb. 7, the most in a month.
Central banks from India to Turkey raised interest rates in January to support their currencies as the U.S. Federal Reserve pushed ahead with plans to reduce monetary stimulus.
Nabiullina may not have that option after President Vladimir Putin asked the central bank last month to work on reducing rates on corporate loans. Russia should harness domestic sources to ignite growth, including cheaper credit to the economy, Putin said last year.
“Any hikes in rates to curb panic on the foreign-exchange market are highly unlikely, due to a sluggish economy and the central bank’s voiced tolerance of a more flexible ruble,” Vladimir Kolychev and Daria Isakova, economists at VTB Capital, said in a research note Feb. 12.
The economy of the world’s biggest energy exporter advanced 1.3 percent in 2013, decelerating for a fourth year as a slowdown in consumer spending failed to make up for declining investment and a drop in global demand for Russia’s commodity exports. The slump may extend through the first quarter, Deputy Economy Minister Andrei Klepach said Jan. 31.
Inflation has remained above the central bank’s target for 17 months, decelerating to 6.1 percent in January from a year earlier and from 6.5 percent in December.
A majority of Russians believes a weaker currency will affect their lives by increasing the cost of living and utility prices, according to a poll by the Public Opinion Foundation conducted Feb. 2 and published this week. The survey has a margin of error of no more than 3.6 percentage points.
Bank Rossii may use another instrument in its toolkit, increasing the rate on currency swaps, “but only if the ruble remains under heavy pressure,” according to Morgan Stanley. The regulator last changed its level in December 2012, reducing it by a quarter point to 6.5 percent.
“We now see a risk of higher inflation from foreign currency pass-through in the second half of the year, which may delay easing,” Morgan Stanley economists Jacob Nell and Alina Slyusarchuk said in a note Feb. 7.