Bloomberg News

Russian Inflation Rate Probably Fell in March From 18-Month High

April 03, 2013

Russian consumer-price growth probably slowed in March from the fastest pace in 18 months, adding pressure on the central bank to heed the government’s calls to cut the main interest rates.

The inflation rate fell to 7.2 percent from a year earlier after 7.3 percent in February, the highest rate since August 2011, according to the median estimate of 21 economists in a Bloomberg survey. Prices probably rose 0.5 percent from the previous month, another poll showed. The Federal Statistics Service in Moscow will release the data this week.

Rising inflation, spurred by increases in alcohol and transport costs adding to the effect of last year’s drought driving up food rices, kept Bank Rossii from lowering its main interest rates this week. Policy makers cut the cost of some lesser used credit instruments, in what outgoing Chairman Sergey Ignatiev yesterday said was the “first decision” toward monetary easing.

“We are likely to see a further deceleration in inflation, in particular in the second half of the year,” Juri Kren, an emerging-markets economist at IdeaGlobal in London and the second-best forecaster among analysts polled by Bloomberg, said by phone on April 2. “Together with the fact that the economy has slowed quite significantly over the last few months, and also considering political pressure, I think this should be enough for the central bank” to ease borrowing costs.

The ruble has declined 5.4 percent against the dollar since Feb. 1 when it hit an eight-month low of 29.8590. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 3 basis points to 203 at 3:30pm in Moscow, according to JPMorgan Chase & Co. (JPM:US) indexes. The difference compares with 179 for debt of similarly-rated Mexico and 188 for Brazil.

Growth Slows

The Russian economy expanded 2.1 percent in the fourth quarter from a year earlier, the slowest pace since a recession in 2009. Ignatiev yesterday said he was “seriously concerned” with the deceleration of growth, which he said continued into the start of this year with a 1.5 percent drop in industrial production in January and February from a year earlier.

Elvira Nabiullina, Putin’s former economy minister and current aide, is poised to take over at the helm of monetary policy in June, when Ignatiev’s third and final term expires.

Weaker lending to companies presents a “huge challenge” to the country’s financial industry, she said in speech yesterday. Bank Rossii “can’t compensate for all of the market sources of financing of the banking system,” she added.

Rates Held

The central bank this week kept the benchmark reference rate at 8.25 percent for a seventh month. High rates are partially to blame for low investment, Finance Minister Anton Siluanov said yesterday.

Deputy Economy Minister Andrei Klepach called for stimulus measures in an interview on Russian state television on April 1, saying the economy of the largest energy exporter is growing more slowly than the government’s 2.8 percent “conservative” estimate for 2013. This compares with the 5 percent growth target set by Prime Minister Dmitry Medvedev.

Central bank Deputy Chairman Sergey Shvetsov sparred with Klepach, who oversees Russian forecasts, at a conference last week over whether lower rates would boost the slowing economy.

The central bank still expects to contain inflation below 6 percent, the top of its target range, Ignatiev said yesterday, adding that the rate was 7.2 percent as of March 25. A drop in grain prices that began in February and will probably continue for the coming months is an important factor, he said.

‘Entirely Realistic’

“We still intend to achieve a reduction in inflation by the end of 2013 to a level of no more than 6 percent,” he said, calling the task “entirely realistic.”

Ignatiev said that interest rates may be cut before inflation decelerates to within the central bank’s target range, without providing figures.

The annual rate of consumer-price growth has surged from 6.6 percent in December, which Ignatiev said was primarily a result of “temporary factors” including higher excise taxes on goods including alcohol and a surge in grain prices.

“There is always a chance of a bad harvest, in Russia or globally, pushing up food prices but given that the harvest was bad already in 2012, the chances are that we’ll see food price deflation in August-September so I’m expecting annual inflation to drop clearly starting in July when the base effect eases,” Sanna Kurronen, an economist with Danske Bank A/S (DANSKE) in Helsinki, said on April 2.

Inflation Outlook

Consumer-price growth will slow to 6.8 percent by the end of the first half and to 5.9 percent by the end of 2013, according to the median estimate of 36 analysts in a Bloomberg survey between March 22 and March 27. Bank Rossii will cut rates by 25 basis points or 0.25 percentage point, in the second quarter, with the refinancing rate falling to 7.5 percent by next year, the poll showed.

The central bank on April 2 cut rates on loans backed with gold and non-market collateral, and costs of some longer-term repurchase operations by a quarter percentage point, while also dropping last month’s phrase that market rates were acceptable.

Nabiullina’s arrival at Bank Rossii may make rate cuts more probable, Vladimir Osakovskiy, chief economist for Russia at Bank of America (BAC:US) Merrill Lynch, told Bloomberg Television in an interview yesterday.

“The central bank in general will be much more dovish with her as a governor but we think the central bank will start cutting rates even before she will become the next governor,” Osakovkiy said. “With such weak growth and as inflation seems to already have peaked, we think the central bank might already start cutting rates in May or in June.”

To contact the reporter on this story: Ott Ummelas in Tallinn at

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

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