Bloomberg News

Russia Leaves Interest Rates Unchanged to Cap Lending Growth

November 09, 2011

(Updates with economist comments starting in third paragraph.)

Oct. 28 (Bloomberg) -- Russia’s central bank left borrowing costs unchanged to keep a lid on inflation by containing domestic credit growth after cutting lending rates for the first time in 15 months in September.

Bank Rossii held the refinancing rate at 8.25 percent after two increases this year, the central bank said today in a statement on its website. The overnight auction-based repurchase rate remained at 5.25 percent and the deposit rate was left at 3.75 percent. The decision was in line with economist forecasts, according to three Bloomberg surveys.

Banks have been lending “fairly aggressively,” and policy makers are reluctant to ease rates, said Vladimir Pantyushin, chief economist at Barclays Capital in Moscow. “The central bank took a small step toward easing monetary policy last month” by reducing the repo rate and “clearly doesn’t want to pour in additional money to support that.”

Economic growth in Russia, the world’s largest energy exporter, expanded the most in three years last quarter as lending to households spurred demand, the Economy Ministry said Oct. 25. Loan growth may reach 24 percent this year, which is “a bit too fast,” central bank First Deputy Chairman Alexei Ulyukayev told lawmakers last week.

‘Continually Rising’

Consumer demand has risen because of lower unemployment, growth in real disposable incomes and "continually rising lending to households," Bank Rossii said today. Those factors may spur the economy and also become a source of "inflationary pressure," it said.

The ruble kept gains against the dollar, rising 0.3 percent to 29.8464 by 4:20 p.m. Investors are betting interest rates will fall 26 basis points over the next three months, compared with expectations of as much as 120 basis points of increases in September, according to forward-rate agreements tracked by Bloomberg. Before this week the contracts have only forecast rate cuts once since 2009, on Sept. 27.

The inflation rate fell to 6.9 percent on Oct. 24 from a year earlier, the central bank said. Prices may rise less than 6.5 percent this year, which would be the lowest annual level since the Soviet Union collapsed in 1991, Deputy Economy Minister Andrei Klepach said this week.

With parliamentary elections in December and a presidential vote in March, the central bank would rather see consumer-price growth slow further than risk exceeding its 7 percent target with further rate cuts, Pantyushin said.

‘Politically Painful’

“To miss and end up with 7.1 percent would be politically painful,” Pantyushin said. “Getting, for example, 6.2 would be entirely acceptable and then they can pat themselves on the back and say, look at how well we did, we did more than promised.”

Economic growth accelerated to 5.1 percent in the third quarter, the fastest pace since 2008, after stalling earlier this year. A credit-fueled surge in consumer spending offset slower industrial growth, Klepach said.

Bank Rossii has raised the deposit rate five times since December to 3.75 percent from 2.5 percent. It increased the repo rate twice, from 5 percent to 5.5 percent, before reducing it by a quarter-point last month. That narrowed the so-called interest-rate corridor in which market rates tend to fluctuate to 1.5 percentage points from 2.5 percentage points.

By cutting the difference between the price Bank Rossii absorbs and offers money, policy makers sought to limit volatility in money-market rates, according to the bank’s statement last month.

‘Heightened Demand’

Tight liquidity has prompted lenders to show “heightened demand” for refinancing tools in recent months, policy makers said in the statement. Money-market interest rates are at an “adequate” level to balance risks from inflation and an economic slowdown, the regulator said, maintaining wording from earlier statements.

“The increase in volumes of liquidity offered by Bank Rossii will help limit increases in market rates,” the central bank said.

MosPrime, the average rate Russian banks charge to lend money to each other overnight, fell for a second day to 5.51 percent, the lowest in a week. The cost to secure fixed interest payments for a year instead of a floating rate rose 15 basis points, or 0.15 percentage point, to 6.74 percent, according to trading data compiled by Bloomberg.

Boosting Liquidity

Policy makers have boosted liquidity including through higher volumes at repurchase auctions. Bank Rossii offered 700 billion rubles at an overnight auction on Oct. 25, the most in at least two years, and boosted the amount of funds available at its monthly 90-day auction 20-fold to 200 billion rubles.

Vladimir Lavrov, a central bank spokesman, said today by telephone that he had “no information” on whether Bank Rossii’s board discussed a resumption of unsecured loans to banks. The option was on the agenda for the meeting, Kommersant reported today, citing a copy of the document.

The bank has enough other ways to provide liquidity and is not planning to resume the unsecured loans, Ulyukayev said this month.

“Even though ruble liquidity clearly remains a concern for the market, the Russian central bank was reluctant to provide an explicit comment on this,” Sergei Voloboev and Alexey Pogorelov, analysts at Credit Suisse, said today in an e-mailed research note. “The central bank should use the recent favorable inflation trend to reduce the cost of borrowing.”

--With assistance from Denis Maternovsky, Zoya Shilova and Jack Jordan in Moscow. Editors: Paul Abelsky, Andrew Langley

To contact the reporter on this story: Scott Rose in Moscow at

To contact the editor responsible for this story: Balazs Penz at

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