Kopeck-Pinching as a Monetary Cure for Inflation Hounding Russia

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  • Central bank wants to encourage saving by keeping rates high
  • Wage increases and falling deposit rates may rekindle spending

The Bank of Russia is on guard should the nation want to go back to its old free-wheeling habits.

After months of warning about salary increases, the central bank is committing to tighter policy to contain any spillovers into inflation, saying after its meeting in late July that borrowing costs will be held at a level that “encourages saving” and keeps a lid on prices and expectations. Real deposit rates, together with growth in retail savings, could be “the major policy determinants going forward,” according to ING Groep NV. Wages adjusted for inflation added 0.6 percent in July, climbing for a third month in the longest streak since 2014, the Federal Statistics Service said on Wednesday.

“The Bank of Russia creates incentives to save with the key rate,” said Oleg Kouzmin, chief economist for Russia at Renaissance Capital in Moscow and a former adviser to the central bank. “A high benchmark interest rate impacts household demand by encouraging savings and pushes to spend less as loans are expensive.”

Starved of international capital by sanctions over Ukraine, domestic savings are a critical resource for an economy that Uralsib estimates lacked about $60 billion in funding in 2014 for growth to reach 3 percent to 4 percent a year. As the government pivots from a consumer-driven model after the crash in oil prices toward growth led by investment, its goals are increasingly aligning with central bank efforts to subdue inflation once and for all.

Consumer industries took off after more than a decade of booming revenue brought a $2.1 trillion energy windfall -- and with it prosperity the like of which Russia has never seen. Retail-sales growth peaked at almost 19 percent in 2008. Consumer demand then powered the country’s economic recovery in the years after the 2008-2009 crisis. 

With the economy now on track for its longest recession in two decades, monetary-policy makers emphasize that stable and low inflation will help investment by reducing risks for businesses. The central bank wants to hold annual price growth to no more than 6 percent this year, from 7.2 percent in July, and bring it to 4 percent by end-2017. To that end, it’s lowered its benchmark only once in the past year to 10.5 percent, leaving Russia with the world’s second-highest real rates after Belarus.

More Frugal

Russians have grown more reluctant to spend after a spike in inflation and a currency crisis eviscerated incomes over the past two years, pushing savings to 14.1 percent of disposable incomes last year, the highest since 2010 and up from 5.4 percent in 2008. Even as wages recover, retail sales dropped in July for a record 19th month, shrinking 5 percent from a year earlier.

Still, the annual contraction in sales was the smallest since April, faring better than forecast by all but two of 15 economists in a Bloomberg survey, whose median estimate was for a drop of 5.7 percent. Unemployment unexpectedly declined for a fourth month, slipping to 5.3 percent from 5.4 percent in June, according to the statistics service.

Derivatives traders have scaled back their wagers for a rate cut in the next three months. Forward-rate agreements on Wednesday signaled 39 basis points of decreases, down from 65 basis points last week. The ruble lost 0.8 percent against the dollar in Moscow.

“The relatively strong consumption and investment figures in July reduce the need for a central bank rate cut at its Sept. 16 policy rate meeting,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said in a report. “Consumption improvement didn’t damage the strong savings trend.”

Saving Less

That may be about to change. The savings ratio dropped to 10.9 percent of incomes in the first half, with retail savings accounts growing in July at the slowest annual pace in 15 months. The average-weighted rate on retail deposits longer than one year declined to 8.2 percent in June among Russia’s 30 biggest lenders, a drop of 1.2 percentage points from a year ago, central bank data show. The key policy rate was cut by 50 basis points in the same period.

Russian consumers have historically taken one quarter to react to lower interest rates by decreasing savings, according to Goldman Sachs Group Inc.

“A more stable economic environment in 2016 should see the savings ratio decrease, which would free up rubles for discretionary spending,” Goldman Sachs analysts including Clemens Grafe said in a report. “Lower interest rates this year should also discourage consumers from adding to their savings accounts.”

Inflation Threat

The central bank is already alert to the risks. Changes in nominal wages first merited a mention in a central bank statement in April, when they were listed as one of the key threats to prices, alongside budget uncertainty and a slow decline in inflation expectations. Last month, for the first time, policy makers also drew attention to falling rates on deposits, which -- combined with wage increases -- may undercut people’s propensity to save.

“If wages continue to increase, exceeding expectations, deposit rates decline and demand recovers, then there is a risk that households will tend to spend more and that will complicate the central bank’s task of reaching the inflation target,” said Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING in Moscow. “That’s quite a possible scenario, though we don’t see significant risks of wage growth.”