Bloomberg News

Russia May Hold Rates as Inflation Seen Breaching 7% Target

November 25, 2011

(Updates with ruble in seventh paragraph, interest-rate swaps in eighth.)

Nov. 25 (Bloomberg) -- Russia will probably leave borrowing costs unchanged for a second month after central bank Chairman Sergey Ignatiev said inflation may breach the target this year.

Bank Rossii will hold the refinancing rate at 8.25 percent when it meets today after two increases this year, according to all 24 economists in a Bloomberg survey. The overnight auction- based repurchase rate used to provide banks with cash will stay at 5.25 percent, while the overnight deposit rate, used to withdraw liquidity, will be kept at 3.75 percent, according to two separate surveys.

The world’s largest energy exporter is trying to cap inflation at 7 percent this year, the lowest year-end level since the Soviet Union collapsed in 1991. The ruble’s depreciation since August may fan price growth next month as commodity exports power economic growth above 4 percent, which “isn’t bad,” Ignatiev said last week.

“The correct thing would be to leave rates at their current levels,” Dmitry Pikin, a bond-fund manager at Moscow- based Gazprombank Asset Management, which oversees more than 200 billion rubles ($6.4 billion) of investments. “There’s a small chance of a decrease, since inflation for the year has been low, but because of the instable situation in Europe they may leave everything unchanged.”

Debt Crisis

The failure by European leaders to contain the region’s sovereign-debt crisis has sent investors fleeing risky assets. The ruble has fallen 2 percent against the dollar this week, bringing its loss since the end of July to more than 12 percent.

“I’m concerned about the weakening of the ruble, which began in August,” Ignatiev said Nov. 18. “That may influence inflation in December. It’s possible that it may be slightly above 7 percent for the year.”

The Russian currency slid 0.3 percent to 31.5599 per dollar and was unchanged against the euro at the start of trading in Moscow.

Investors are betting interest rates will rise 21 basis points over the next three months, compared with expectations of as much as 29 basis points of cuts on Oct. 27, according to forward-rate agreements tracked by Bloomberg. The cost to get fixed interest-rate payments for a year instead of a floating rate has risen 45 basis points this month to 7.27 percent.

Inflation Unchanged

While inflation in October held steady at 7.2 percent from a year earlier, price growth accelerated on the month, the Economy Ministry said on its website on Nov. 23. Inflation was 0.5 percent in October compared with September after holding flat for the previous four months.

Gross domestic product expanded 5.6 percent in October from a year earlier, pushing growth in the first 10 months to 4.3 percent compared with the same period of 2010, the Economy Ministry said on its website this week. “The real economy right now isn’t bad at all,” Ignatiev said.

“The strong economic activity seen in October should preclude the central bank from easing its monetary policy in the nearest future, especially with inflation at the upper boundary of its target range,” Vladimir Tikhomirov and Polina Badasen, analysts at Moscow-based Otkritie Financial Corp., said yesterday in an e-mailed research note.

The economy will expand 4.1 percent this year before slowing to 3.7 percent in 2012, the government estimates.

Rising Less

The latest weekly inflation data show prices are rising less than a year ago, while in the three preceding weeks consumer prices matched their pace a year ago even with a “significant weakening of the ruble,” Ilya Ilyn, an analyst in the treasury department of OAO Sberbank, Russia’s largest lender, said yesterday in an e-mailed research note.

“We now believe Bank Rossii has an additional argument in favor of easing rates” at today’s meeting, Ilyn said.

Policy makers in Brazil cut borrowing costs by half a point for a second meeting in October and the European Central Bank unexpectedly lowered interest rates Nov. 3. Russia reduced its repo rates by a quarter-point in September and raised deposit rates by the same amount.

Financial-Markets Stability

“With the Russian consumer-price index being at all-time lows and given the liquidity shortage, the central bank is likely to focus on financial-markets stability,” Evgeny Kochemazov, who helps manage about $1.5 billion in assets including Russian debt as deputy chief investment officer at Alfa Capital in Moscow, said yesterday by e-mail.

Lenders including Sberbank and VTB-24, the retail arm of Russia’s second-largest bank, are paying households more for ruble deposits, sending the maximum average rate offered by the country’s 10 biggest deposit takers to 9 percent this month, the most in more than a year and up from 7.88 percent in mid-July. A shortage in liquidity is one reason for the increases, Yulia Demenyuk, a vice president at VTB-24, said in an e-mailed response to questions on Nov. 23.

At the end of October, Russian banks owed the Finance Ministry and central bank more than 2 trillion rubles, which shows “there’s a need for money,” said Leonid Ignatiev, head of fixed-income research at Trust National Bank in Moscow

“Consumer prices aren’t rising, so we think the central bank won’t touch its lending rates before the end of the year, and may even reduce them once by 25 basis points,” he said yesterday by e-mail.

--With assistance from Zoya Shilova in Moscow. Editors: Paul Abelsky, Alan Crosby

To contact the reporter on this story: Scott Rose in Moscow at rrose10@bloomberg.net.

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net.


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