Rus­sia to hold rates be­fore pro-growth Putin ally takes helm

The Pak Banker - - FRONT PAGE -

Rus­sia will prob­a­bly leave bor­row­ing costs un­changed for a sixth month as the cen­tral bank re­sists government pres­sure to trim rates be­fore Pres­i­dent Vladimir Putin’s eco­nomic aide takes charge of mon­e­tary pol­icy.

Bank Ros­sii will hold the re­fi­nanc­ing rate at 8.25 per­cent Fri­day (to­day) at a meet­ing in Moscow, ac­cord­ing to a sur­vey. The overnight and one-week re­pur­chase rates will stay at 5.5 per­cent, while the overnight de­posit rate will be kept at 4.5 per­cent, sep­a­rate sur­veys showed. Cen­tral bank Chair­man Sergey Ig­natiev is lead­ing a charge against in­fla­tion, which has surged to the fastest pace in 18 months, pri­or­i­tiz­ing price growth even as of­fi­cials call for mon­e­tary stim­u­lus to re­vive a flag­ging econ­omy. Putin, who’s said all state in­sti­tu­tions should be steered to­ward pro­mot­ing growth, se­lected his own eco­nomic aide, Elvira Nabi­ul­lina, to take the reins when Ig­natiev steps down in June.

“In­fla­tion won’t start to de­cel­er­ate be­fore April,” Maria Pomel­nikova, an an­a­lyst with ZAO Raif­feisenbank in Moscow, said. “The cen­tral bank may start to ease mon­e­tary pol­icy that month.” The ru­ble, which has de­clined 1.2 per­cent against the dol­lar this year, was lit­tle changed at 30.7800 against the US cur­rency in Moscow. The Micex In­dex traded lit­tle changed at 1,496.62. While Rus­sia’s econ­omy is grow­ing at the weak­est pace since a re­cov­ery be­gan in 2010, in­fla­tion has gath­ered speed, stoked by a bad har­vest and higher ex­cise taxes and trans­port costs. Gross domestic prod­uct rose 1.6 per­cent from a year ear­lier in Jan­uary, com­pared with 2.4 per­cent in De­cem­ber, less than the 5 per­cent growth goal set by Prime Min­is­ter Dmitry Medvedev. Con­sumer prices ad­vanced 7.3 per­cent in Fe­bru­ary, ac­cel­er­at­ing from 7.1 per­cent in Jan­uary and 6.6 per­cent in De­cem­ber.

Eco­nomic out­put re­mains near full ca­pac­ity, while in­fla­tion will prob­a­bly ex­ceed pol­icy mak­ers’ 5 per­cent-6 per­cent tar­get range un­til the sec­ond half, the cen­tral bank said Feb. 12.

The ap­point­ment of a Putin ally to lead the cen­tral bank will prob­a­bly stoke ex­pec­ta­tions of looser pol­icy, Benoit Anne, head of emerg­ing-mar­kets strat­egy at So­ci­ete Gen­erale SA (GLE) in Lon­don, said March 12.

The cen­tral bank’s mon­e­tary-pol­icy ap­proach “isn’t likely to shift dras­ti­cally with Nabi­ul­lina, but there’s the risk of rate cuts be­cause she’s from Putin’s team and headed the Econ­omy Min­istry, which is more con­cerned about growth than in­fla­tion,” Dmitry Polevoy, an econ­o­mist for Rus­sia and Kaza­khstan at ING Groep NV (INGA) in Moscow, said yes­ter­day by phone.

Still, bor­row­ing costs were likely to be trimmed even with­out the change of ste­ward­ship as price growth fades, ac­cord­ing to Natalia Orlova and Dmitry Dol­gin, an­a­lysts at Alfa Bank in Moscow.

“An in­ter­est- rate cut will take place re­gard­less of the se­lec­tion of the new gov­er­nor,” they said yes­ter­day in an e- mailed note. “We ex­pect in­fla­tion to slow af­ter reach­ing a peak in AprilMay and an­tic­i­pate a 25 ba­sis- point rate cut in June- July as soon as the new gov­er­nor is ap­pointed.” Econ­o­mists in a Bloomberg sur­vey forecast a quar­ter- point re­duc­tion in the re­fi­nanc­ing rate in the sec­ond quar­ter and an­other in the fourth. Ig­natiev, who’ll stay on at the cen­tral bank as an ad­viser, said Feb. 15 that he “hopes” in­fla­tion will start to slow in the coming months and with slower price growth, rate cuts are “pos­si­ble.”

The cen­tral bank may be­gin eas­ing mon­e­tary pol­icy be­fore Nabi­ul­lina as­sumes her new role to “pro­tect her cred­i­bil­ity,” ac­cord­ing to Moscow-based VTB Cap­i­tal’s chief econ­o­mist for Rus­sia Maxim Oreshkin, the only an­a­lyst to cor­rectly pre­dict a quar­ter-point re­duc­tion in the cost of swap­ping for­eign cur­rency into rubles and an in­crease of that amount in the de­posit rate at the cen­tral bank’s Dec. 10 meet­ing.

“We think Nabi­ul­lina would bring a slightly more dovish bias, but are keep­ing our base- case sce­nario al­most un­changed,” he said yes­ter­day in an emailed note, pre­dict­ing 75 ba­sis points of rate cuts in the sec­ond and third quar­ters. “At the same time, we do not ex­pect any front-loaded pol­icy eas­ing, as she will try to win more cred­i­bil­ity in the first months of her gov­er­nor­ship.”

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