Rus­sia warns of first rate in­crease in year

The Pak Banker - - COMPANIES/BOSS -

Rus­sia's cen­tral bank warned it may tighten mon­e­tary pol­icy if in­fla­tion risks in­ten­sify af­ter leav­ing its bench­mark in­ter­est rate un­changed for a fourth meet­ing.

The one-week auc­tion rate will re­main at 11 per­cent, the Bank of Rus­sia said in a state­ment on Fri­day. Pol­icy mak­ers re­tracted their pledge to con­tinue mon­e­tary eas­ing, warn­ing in­stead of a pos­si­ble rate in­crease. They also ac­knowl­edged that risks have grown that in­fla­tion may "de­vi­ate" from their 4 per­cent tar­get in late 2017.

"Should in­fla­tion risks amplify, the Bank of Rus­sia can't rule out a tight­en­ing of its mon­e­tary pol­icy," it said in the state­ment. "Against the back­drop of yet an­other oil price slump, monthly con­sumer-price growth rates sta­bi­lized at a high level, with a higher risk of ac­cel­er­ated in­fla­tion. The de­te­ri­o­ra­tion in global com­mod­ity mar­kets will re­quire a fur­ther ad­just­ment of the Rus­sian econ­omy."

Swings in oil have whip­sawed the ru­ble, leav­ing Rus­sia at risk of a se­cond year of re­ces­sion af­ter crude prices re­sumed their slump at the start of 2016. While con­sumer-price growth is set to de­cel­er­ate this month to the slow­est in more than a year, pol­icy mak­ers are opt­ing to wait out tur­moil in the oil mar­ket and the ru­ble af­ter point­ing to el­e­vated in­fla­tion ex­pec­ta­tions.

Lower prices for Rus­sia's main ex­ports may re­sult in a "more siz­able" eco­nomic con­trac­tion than fore­cast pre­vi­ously for 2016 in the cen­tral bank's base­line sce­nario, it said. While the econ­omy will prob­a­bly re­turn to growth next year, its pace of ex­pan­sion will be "low," pol­icy mak­ers said.

"For the first time since paus­ing its mon­e­tary-pol­icy eas­ing cy­cle in Septem­ber, the Bank of Rus­sia ex­plic­itly said that the next move could be a hike rather than a cut," said Piotr Matys, a strate­gist for emerg­ing-mar­ket cur­ren­cies at Rabobank in Lon­don. "The cen­tral bank may have to se­ri­ously con­sider the pos­si­bil­ity of rais­ing rates if the worst-case sce­nario" un­folds of Brent crude fall­ing below a 2003 low and the ru­ble weak­en­ing be­yond 100 ver­sus the dol­lar in the near fu­ture.

While the ru­ble is down about 3 per­cent against the dol­lar this year, it's gained as oil ad­vanced af­ter Rus­sia's en­ergy min­is­ter said OPEC and other pro­duc­ers may meet. The Rus­sian cur­rency traded 0.7 per­cent stronger at 75.8600 against the dol­lar as of 1:50 p.m. in Moscow. Crude has pared its drop this year af­ter ear­lier plung­ing to a 12-year low.

While the cen­tral bank is backed into a cor­ner for now, the re­ces­sion-hit econ­omy needs re­lief af­ter gross do­mes­tic prod­uct con­tracted 3.7 per­cent last year amid plung­ing in­vest­ment and con­sumer de­mand.

The prob­a­bil­ity of the econ­omy re­main­ing in re­ces­sion in the next year in­creased to 80 per­cent from 65 per­cent a month ago, ac­cord­ing to an­a­lysts polled by Bloomberg. GDP will con­tract 0.7 per­cent this year, worse than last month's fore­cast for a 0.5 per­cent de­cline, the sur­vey showed.

An­nual con­sumer-price growth eased to 12.9 per­cent in De­cem­ber and will reach about 10 per­cent in Jan­uary, pol­icy mak­ers said Fri­day. While ac­knowl­edg­ing the risk that in­fla­tion will ac­cel­er­ate in the se­cond quar­ter, the Bank of Rus­sia said price growth will then re­sume its de­cline and slip below 7 per­cent as early as next Jan­uary.

"The cen­tral bank made the right de­ci­sion," said Natalia Orlova, chief econ­o­mist at Alfa Bank in Moscow. "The hawk­ish un­der­tones are a nat­u­ral re­sponse to the re­cent ru­ble ' mini-cri­sis,' given that bouts of ru­ble weak­en­ing nor­mally boost in­fla­tion­ary ex­pec­ta­tions."

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