Bloomberg News

Russia Holds Rates After Inflation Declined to Record Low

February 03, 2012

(Updates with central bank comment in fourth paragraph.)

Feb. 3 (Bloomberg) -- Russia refrained from cutting interest rates after a surprise reduction in December even as inflation plunged to the lowest level in two decades.

Bank Rossii held the refinancing rate at 8 percent, according to a statement published on its website today. The decision was forecast by 11 of 15 economists in a Bloomberg survey. The overnight auction-based repurchase rate used to provide cash for banks stays at 5.25 percent, while the overnight deposit rate will remain at 4 percent.

Russia has followed emerging-market countries such as Brazil and Thailand in lowering borrowing costs as Europe’s debt crisis threatens to stall global demand. Central bank Chairman Sergey Ignatiev wants to trim the inflation rate to 5 percent and 6 percent in 2012 from a record-low 6.1 percent last year as economic expansion outpaces forecasts. Price growth fell to 4.1 percent as of Jan. 30 from a year earlier, according to the statement.

“A planned delay of increases on the majority of regulated prices and tariffs to mid-2012” contributed to slower price growth, policy makers said. “Bank Rossii is taking into account the temporary nature of this effect and continues to focus on mid-term inflation forecasts in its monetary policy decisions.”

The Micex Index of 30 stocks kept declines after the announcement, retreating 0.2 percent at 1,539.83 as of 10:54 a.m. in Moscow, while the ruble traded 0.2 percent weaker at 30.26 against the dollar.

Unemployment, Retail Sales

The world’s largest energy exporter grew faster than economists forecast last year, expanding 4.3 percent and returning to output levels before a 7.8 percent contraction in 2009. Unemployment unexpectedly fell to 6.1 percent in December while retail sales soared at the fastest pace in more than three years.

“The unemployment rate is down to a level where you would expect price pressures to start building up,” Clemens Grafe, chief economist at Goldman Sachs Group Inc. in Moscow, said Feb. 1 by telephone. “The data as it has come in has probably been stronger than what the central bank was expecting.”

OAO Magnit, the country’s largest food retailer by market value, was among the companies that benefited from surging domestic demand, posting a 20 percent gain in net income last year. OAO AvtoVAZ, the biggest carmaker, boosted Russian sales 11 percent in 2011.

Biggest Threats

Record-low inflation may help Prime Minister Vladimir Putin solidify voter support as he seeks to reclaim the presidency in March elections. Prices and poverty are seen as the biggest threats facing the country this year, according to a Jan. 31 poll by the independent Levada Center.

Bank Rossii unexpectedly cut the refinancing rate to 8 percent from 8.25 percent and lowered the rate on fixed repurchase facilities by a quarter point to 6.25 percent while raising the overnight deposit rate by the same amount to 4 percent at its last meeting in December.

The changes were intended to be “neutral” for monetary policy while helping policy makers manage interbank interest rates, which tend to fluctuate within that range, the central bank said in its statement.

The inflation rate fell to a “marvelous” 4.7 percent and may drop further in the near term, central bank First Deputy Chairman Alexei Ulyukayev said last week. Consumer-price growth this month probably won’t exceed the rate in January, when it reached about 0.5 percent, Deputy Economy Minister Andrei Klepach said Feb. 1.

Retail lending will slow “significantly” this year, while stagnation is “very probable” for manufacturers in the coming months, Klepach said. Gross domestic product will rise 3.7 percent this year, the government predicts.

Bank Rossii will reduce interest rates once risks to economic growth outweigh the need to slow inflation, Ulyukayev said last week in Davos, Switzerland.

“At present, such a situation isn’t in sight,” he said.

--With assistance from Artyom Danielyan, Zoya Shilova and Jack Jordan in Moscow. Editors: Paul Abelsky, Torrey Clark

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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