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Russia May Hold Rates as Economy Accelerates, Inflation Slows

October 26, 2011

Oct. 27 (Bloomberg) -- Russia will leave borrowing costs unchanged this month after inflation slowed and booming consumer demand spurred the economy to the fastest growth in three years, a survey showed.

Bank Rossii will leave the refinancing rate at 8.25 percent when it meets tomorrow after two increases this year, according to 23 of 24 economists in a Bloomberg survey. The overnight auction-based repurchase rate, used to provide banks with cash, will stay at 5.25 percent, 20 of 21 economists said. All 22 economists in a third survey said the deposit rate, used to withdraw liquidity, would be held at 3.75 percent.

Economic growth in Russia, the world’s largest energy exporter, expanded the most in three years last quarter as lending to households spurred demand, the Economy Ministry said Oct. 25. While inflation has slowed, the ruble has lost 9.2 percent against the dollar since June as Europe’s debt crisis hurts demand for emerging-market assets, lowering the scope for a rate cut.

“I think it makes more sense for them to wait,” Ivan Tchakarov, chief economist for Russia and the CIS at Renaissance Capital in Moscow, said yesterday by phone. “They could have cut the repo rate again if this global deterioration that started a couple of months ago had continued. But over the past two weeks, things seem to have normalized a bit.”

Rate Changes

Bank Rossii has raised the overnight auction-based deposit rate five times since December to 3.75 percent from 2.5 percent. It increased the repurchase rate twice, from 5 percent to 5.5 percent, before reducing it by a quarter-point last month. That narrowed the so-called interest-rate corridor in which market rates tend to fluctuate to 1.5 percentage points from 2.5 percentage points. The benchmark refinancing rate remained at 8.25 percent.

Lenders have taken hundreds of billions of rubles daily in central bank auctions of overnight funds since the move last month. By narrowing the difference between the price Bank Rossii pays for and offers money, policy makers tried to limit volatility in money-market rates, the regulator said Sept. 14.

Loan growth may reach 30 percent this year, Deputy Economy Minister Andrei Klepach said, above the central bank forecast of 24 percent, which is “a bit too fast,” First Deputy Chairman Alexei Ulyukayev told lawmakers last week.

The overnight MosPrime rate, which banks say they charge one another, rose yesterday to 5.81 percent, the highest since January 2010 and up from 4.13 percent on Sept. 13, the day before the central bank’s last meeting.

Floating Costs

The cost to lock in fixed rather than floating interest payments for a year has jumped 159 basis points, or 1.59 percentage points, to 7.035 yesterday from 5.445 on Sept. 13, interest rate swap trading data compiled by Bloomberg show. The rate rose to as much as 7.9 percent on Sept. 26, the most in almost two years.

The Reserve Bank of India lifted interest rates for a 13th time since the start of 2010 this week, while China hasn’t raised borrowing costs since July. Brazil, facing weaker economic growth, has cut its Selic rate twice since August to 11.5 percent from 12.5 percent.

The surge in Russian swap costs reflects the ruble cash squeeze after the central bank sold at least $14 billion in foreign currency since Sept. 1 rather than expectations of rate increases by Bank Rossii, according to Moscow-based Alfa Bank, Russia’s largest private lender.


“Lowering mandatory reserve requirements, which have blocked up almost 350 billion rubles, would be justified to lower interest rates for loans,” Natalia Orlova, chief economist at Alfa, said yesterday by e-mail. The central bank may nonetheless prefer to take a “wait-and-see stance” to determine whether an expected jump in federal spending in November and December eases the situation.

Russia’s federal budget surplus through September expanded to almost 1.1 trillion rubles, or 2.8 percent of gross domestic product. The government and central bank have said they expect the budget to be close to balanced by year-end.

Consumer prices may rise less than 6.5 percent this year, the bottom of the government’s forecast range and the lowest annual rate since the fall of the Soviet Union, Klepach said. The inflation rate was 7.2 percent in September compared with 8.2 percent the previous month.

The central bank should reduce borrowing costs now that inflation is “well below” the refinancing rate and money- market interest rates have risen, Vladimir Osakovskiy, chief economist for Russia at Bank of America Merrill Lynch, said yesterday by telephone.

‘Window of Opportunity’

“In these kinds of conditions the central bank usually delivered monetary easing,” said Osakovskiy, who forecasts quarter-point cuts to the refinancing rate and repurchase rate. “It started to do so in September and that’s why we think there’s a window of opportunity for the central bank to deliver another rate cut.”

Bank Rossii may also choose to lower borrowing costs over concern that growth may not be sustainable, Osakovskiy said. Industrial production expanded last month at the slowest pace since it began expanding in October 2009 as export demand weakened. Borrowing may dry up if the liquidity situation deteriorates further, he said.

Russia should stop “dreaming” about economic growth of more than 4 percent, central bank First Deputy Chairman Alexei Ulyukayev said in an interview with the Moskovskiye Novosti newspaper this month.

--With assistance from Zoya Shilova and Alena Chechel in Moscow. Editors: Alan Crosby, Andrew Langley

To contact the reporter on this story: Scott Rose in Moscow at

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

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