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2 April 2013

With Eye on Inflation, Russia Holds Rates

By Andrey Ostroukh

MOSCOW-Russia's central bank kept its most important interest rates unchanged Tuesday, choosing to put pressure on stubbornly high inflation rather than stimulate an economy which it admitted is slowing sharply.

The bank made only a token cut of a quarter of a percentage point to its longer-term refinancing rates, which it said wouldn't have any impact on money-market rates, but kept the key rates at which it provides liquidity, one-day and one-week auction repo rates, at 5.5%.

The central bank, which is facing calls from politicians and entrepreneurs to cut rates in order to support the economy, argued that annual inflation, at 7.2% in March, was still above its target range of 5%-6%, and said it needed to guard against a possible rise in the public's own expectations of inflation, especially in view of planned tariff rises for natural monopolies such as railways, water and communal heating.

However, it also hinted that it may yet ease policy soon, saying that it expects inflation to fall to within the target range in the second half of this year.

The next rate-setting meeting is scheduled for the first half of May. At the end of June, Elvira Nabiullina will replace Sergey Ignatyev at the head of the central bank, and is expected by many observers to take a more activist approach to supporting growth. She declined to talk to reporters Tuesday.

Growth in Russia, one of Europe's largest economies, slowed to 3.4% last year from 4.3% in 2011, according to data released Tuesday by statistics agency Rosstat, and preliminary government estimates suggest it has virtually ground to a halt since, with a handful of key indicators suggesting growth of only 0.1% on the year in February.

The central bank acknowledged "increased risks of the economy slowing down" and pointed to falls in both industrial output and retail sales in February. It also acknowledged that confidence was weakening. Against that, it noted that a healthy labor market and supply of credit were supporting domestic demand.

The cut "appears to be largely symbolic and should have little impact on overall monetary conditions," analysts at research company Capital Economics said in a note to clients. They argued that the weakness in both consumer spending and investment may made their forecast of 2.8% growth for this year too optimistic. The government is officially forecasting growth of 3.6%.

Local analysts were more upbeat, with VTB Capital chief economist for Russia Maxim Oreshkin seeing the modest cuts in rates as "the start of the long-awaited cycle of monetary policy easing."

He said, however, that cuts in the central bank's short-term auction repo rates would have had more of an effect.

In all, the central bank cut minimal rates at repo and Lombard auctions for three, six and 12 months by 0.25 percentage point to 6.75%, 7.25% and 7.75% respectively. It also lowered gold-backed loan rates by the same amount to 6.75% for three months, 7.25% for six months and 7.75% for up to one year.

Also, the central bank cut rates of loans secured by nonmarketable assets and guarantees by 0.25 percentage point to 7% for three months, 7.5% for six months and 8% for up to a year.

Alexander Kolyandr in Moscow contributed to this article.

Corporate Communications VTB Capital