Bloomberg News

Russia Seen Withstanding Rate-Cut Calls on Inflation Jump

February 11, 2013

Russia will probably refrain from easing borrowing costs this month after inflation surged to a 15-month high and the central bank indicated it wouldn’t yield to government calls for lower rates.

Bank Rossii will hold the refinancing rate at 8.25 percent for a fifth month at tomorrow’s meeting in Moscow, according to 21 of 22 economists in a Bloomberg survey. One predicted a cut. The overnight and one-week repurchase rates most used to lend banks cash will stay at 5.5 percent and the overnight deposit rate will be kept at 4.5 percent, two other surveys showed.

Russia, the largest emerging nation to raise rates in 2012, is facing growing government pressure to ease monetary policy after economic growth last year slowed to 3.4 percent, the weakest since a 2009 recession. The central bank relies only on its own forecasts and won’t be swayed, First Deputy Chairman Alexei Ulyukayev said last week as data showed the quickest inflation in 15 months in January.

“We expect the central bank to hold all of its key rates,” Artem Arkhipov, an economist at ZAO UniCredit Bank in Moscow, said Feb. 8 by e-mail. “They’ll probably cite the short-term surge in inflation and the lack of a gap between the economy’s current output and its potential.”

Derivative Bets

Three-month borrowing costs may drop 11 basis points, or 0.11 percentage point, over the next three months, according to forward-rate agreements tracked by Bloomberg. That’s down from 24 basis points Jan. 14, the day before the last rates meeting. The cost to swap floating interest payments into a fixed rate for a year rose to 7.0741 percent after falling Feb. 8 to the lowest level since May, according to data compiled by Bloomberg.

Economic growth slowed to 2.4 percent from a year earlier in the fourth quarter, according to a Bloomberg survey, less than half the annual target set by Prime Minister Dmitry Medvedev. Consumer prices rose 7.1 percent from a year earlier in January, faster than all 21 forecasts in a Bloomberg survey.

Inflation may accelerate to 7.3 percent to 7.4 percent in February from a year earlier, the Economy Ministry said in a report today. The rate may fall in monthly terms to 0.6 percent to 0.7 percent, down from a 1 percent advance in January.

Government officials including First Deputy Prime Minister Igor Shuvalov and Finance Minister Anton Siluanov have joined the Economy Ministry in the last month in saying interest rates should be reduced because they’re smothering growth.

Government Relations

“Our relations with the government are just as they should be, and the government respect’s the central bank’s independence on monetary policy,” Ulyukayev told a Feb. 6 news conference. “We’re going to make a decision based on our understanding, after having listened to all the arguments, including from our respected colleagues in the government.”

Bank Rossii raised all its interest rates in September as consumer-price growth exceeded the 6 percent upper limit of policy makers’ target range. It left borrowing costs unchanged last month, saying that while economic growth was cooling, inflation remained too high.

“Because of the political noise around the central bank, they may want to explain their position more clearly,” Alexander Morozov, chief economist for Russia at HSBC Holdings Plc in Moscow, said Feb. 8 by phone. “First, that lower policy rates would not help boost economic growth and second, that conditions for policy rate cuts would require inflation to be much lower.”

The central bank may reduce the repo and deposit rates by a quarter-point in October, while the refinancing rate -- which is of less importance to banks -- may be reduced earlier, according to Morozov.

Key Phrase

Policy makers removed a phrase from January’s monthly statement that market rates were acceptable for the “nearest future,” which Ulyukayev has said is a signal that Bank Rossii may change rates in any direction as soon as the next meeting. Growth is near potential and any easing now would be counterproductive, he told a conference last month.

Still, with President Vladimir Putin required to nominate a new central bank chief three months before Chairman Sergey Ignatiev’s third and final term ends in June, policy makers may not be resistant to calls for lower interest rates, according to Julia Tsepliaeva, head of research for BNP Paribas SA in Moscow.

“Keeping rates on hold and failing to appease its critics will dramatically increase the chances of an external candidate taking the helm,” she wrote in a Feb. 8 report. “The bank will not be immune to the rise in political pressure or the near incessant media condemnation.”

Ignatiev, 65, told Putin at a meeting Jan. 31 that rates would be lowered once inflation decelerates.

Billionaires’ Stance

Billionaires including Oleg Deripaska, chief executive officer of United Co. Rusal, and the heads of Russia’s two biggest banks have criticized the central bank for strangling economic growth by focusing on damping inflation.

Investment in annual terms contracted twice in the last four months of 2012, signaling that the spending needed to support faster economic growth in the future is stalling. Russia’s trade surplus fell 17 percent in December from a year earlier as exports tumbled, the central bank said on its website today.

Bank Rossii will probably wait until the inflation rate falls later this year before easing rates, said Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch in Moscow.

“Inflation surprised negatively in January,” he said Feb. 8 by e-mail. “It would be detrimental to trust and market confidence if they were to keep saying that they are independent and inflation is a concern, but cut rates in order to accommodate the pressure.”

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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