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5 October 2012
Russia Set to Pause on Rates as Inflation Breaches Target Range


Scott Rose and Olga Tanas (Bloomberg)

Russia’s central bank will probably hold back from raising interest rates after a surprise increase last month, a pause that may prove brief after inflation quickened past the target range to the fastest in 10 months.

Bank Rossii will hold the refinancing rate at 8.25 percent at a meeting today after a quarter-point increase in September, according to 19 of 22 economists in a Bloomberg survey. Three predict a boost to 8.5 percent. The regulator’s main short-term lending and deposit rates will remain at 5.5 percent and 4.25 percent, two separate surveys showed.

While economists project the central bank will raise borrowing costs again before the end of this year, policy makers may delay further increases as they gauge the impact of higher rates on a slowing economy and the government steps up efforts to hold down grain prices. Russia is planning to start sales of wheat from state reserves, with export restrictions remaining in the government toolkit for fighting inflation.

“The central bank will simply wait to see what happens with inflation and how much the pressure is rising,” said Sergey Aleksashenko, director of macroeconomic research at the Higher School of Economics in Moscow and a former first deputy chairman of Bank Rossii. “That would require at least two months. Why go and raise rates again after just a couple of weeks?”

Three-month borrowing costs may grow 21 basis points, or 0.21 percentage point, in the next three months, up from expectations of 14 basis points of increases before last month’s rate meeting, according to forward-rate agreements tracked by Bloomberg. The cost to fix floating interest payments in rubles for a year using rate swaps was 7.59 percent yesterday.

Putin’s Priority

Russia, the only major emerging market to raise interest rates this year, is struggling to keep a lid on prices after droughts in the U.S. and locally drove up food costs. The government’s top priority is fighting inflation, even at the expense of short-term growth, President Vladimir Putin said Oct. 2 at an investment conference in Moscow.

Consumer prices rose 6.6 percent in September from a year earlier, led by the cost of bread, meat and alcohol, exceeding the median forecast of 6.5 percent in a Bloomberg survey, the Federal Statistics Service said yesterday.

The government may resort to “alternative means” of subduing inflation without monetary-policy tightening, according to Eurasia Group in Washington. The authorities may instead impose price caps or limit exports of grain in a bid to reverse the slump in approval ratings for Putin and Prime Minister Dmitry Medvedev, the research group said last month.

No Reason

“The central bank isn’t likely to raise twice in a row,” Andrey Kostin, chief executive officer of state-run VTB Group, Russia’s second-biggest bank, said in an interview. “I don’t see any reason to raise rates, and I think a fairly sharp increase in rates would lead to a fairly sharp rise in rates for loans and deposits. That wouldn’t really be right for the economy.”

The world’s largest energy exporter will probably grow 3.5 percent this year, less than the 4.3 percent pace in the previous two years, according to the Economy Ministry. Retail sales, a measure of the household consumption that accounts for about half the Russian economy, advanced 4.3 percent in August, the weakest level in 29 months.

Bank Rossii is now targeting an inflation range of 5 percent to 6 percent for next year, the same as for 2012 and a half-point higher than the earlier target, according to a medium-term monetary-policy strategy published yesterday. Policy makers will seek to contain consumer-price growth at 4 percent to 5 percent in 2014 and 2015.

New Policy?

“The next meeting will be very important in signaling whether it was just a one-off increase as a reaction to the observed inflation or it’s a new policy,” said Vladimir Potapov, global head of portfolio management at VTB Capital Investment Management in Moscow, adding that he doesn’t expect any change. “We may see some short-term profit taking on fixed income if they increase.”

Central bank First Deputy Chairman Alexei Ulyukayev sparked speculation among investors that policy makers may raise rates again after saying Oct. 2 that inflation risks remain greater than dangers to the economy.

Inflation Credentials

Even so, the regulator’s improving credibility on fighting price growth is bolstering investor sentiment, which might spur demand for longer-term bonds to profit from a reduced inflation premium, Potapov said in an interview at an investment forum organized by VTB Capital.

The central bank may consider raising the overnight deposit rate, reducing the difference from the main lending rates to 1 percentage point from 1.25 percentage points now, analysts at ZAO Raiffeisenbank in Moscow said yesterday in a research note.

“Given the disappointing macro data, we think a pause in raising rates or an increase of just the deposit rates in October would look more justified,” they said. “The central bank may note a drop in consumer activity in its October statement, though the focus will probably remain on inflation risks.”

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