Bloomberg News

Russia to Hold Rates as Inflation Risks Escalate, Survey Shows

February 03, 2012

Feb. 3 (Bloomberg) -- Russia will probably refrain from cutting interest rates this month after a surprise reduction in December as rising consumer demand threatens to boost inflation.

Bank Rossii will leave the refinancing rate at 8 percent, according to 11 of 15 economists in a Bloomberg survey. The overnight auction-based repurchase rate used to provide cash for banks will stay at 5.25 percent, while the overnight deposit rate will remain at 4 percent, separate surveys showed. Policy makers will announce the decision later today.

Central bank Chairman Sergey Ignatiev wants to trim the inflation rate to between 5 percent and 6 percent in 2012 from a record-low 6.1 percent last year as economic growth outpaces forecasts. Russia has followed emerging-market countries like Brazil and Thailand in lowering borrowing costs as Europe’s debt crisis threatens to stall global demand.

“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.”

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.

Micex, Ruble Gain

The 30-stock Micex Index appreciated 8 percent in January for its biggest monthly gain since October. The gauge added 0.2 percent yesterday to 1,542.39 at the close in Moscow. The ruble strengthened 6.5 percent versus the dollar last month and was little changed at 30.20 against the U.S. currency yesterday.

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.

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.

Policy makers may keep the main rates unchanged at today’s meeting even as they may make another quarter-point reduction in the fixed repurchase rate to 6 percent, Alexei Moiseev, chief economist at VTB Capital in Moscow, said by e-mail.

‘Reduce Tension’

Three economists of 15 surveyed by Bloomberg predicted the central bank will cut the refinancing rate by a quarter-point, with one analyst called for a half-point cut.

“A change to the fixed repo rate may be used to reduce tension on the money market while maintaining their concern on inflation,” Moiseev said. “They’ve said inflation will rise, and they really squeezed liquidity in the money market.”

Investors are betting on lower interest rates with forward- rate agreements signaling a decrease of 13 basis points, or 0.13 percentage point, in the next three months, compared with expectations of as much as 120 basis points of increases in September.

The contracts have forecast monetary easing or unchanged rates since early December, the longest stretch since 2009. The cost to lock in interest payments for a year climbed to 6.93 percent, interest-rate swaps show.

Surprise Cut

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 Zoya Shilova in Moscow. Editors: Paul Abelsky, Balazs Penz

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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 -0- Feb/01/2012 13:17 GMT


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