UPDATE 2-Russian central bank holds rates as high inflation trumps weak growth

30 Oct 2015 | Author: | No comments yet »

Russia Ready to Resume Rate Cuts After Easing Pause Extended.

The Bank of Russia will “continue with a downward revision of its key rate at one of its forthcoming” meetings if the consumer-price index drops in line with its forecasts, it said in a statement Friday. Policy makers the same day left borrowing costs unchanged for a second month, citing “persistent substantial inflation risks.” “The central bank’s wording about possible easing is much stronger than usual,” Alexey Pogorelov, an economist at Credit Suisse in London, said by e-mail. “Today’s decision not to cut rates was hard as we can see from a very dovish statement.” Rate setters led by Governor Elvira Nabiullina are plotting a course for the world’s largest energy exporter out of a recession that threatens to be Russia’s longest in two decades. The yield on five-year notes rose five basis points to 10.13 percent, a set-back for Russian government bonds that have handed investors the world’s best returns this year.

While the monetary authority has rolled back most of a December emergency rate increase, a fresh bout of ruble weakness forced policy makers to refrain from easing last time around after five consecutive cuts. Analyst forecasts were split over whether the bank would cut rates or keep them unchanged on Friday, and are similarly split regarding the central bank’s next board meeting scheduled for Dec. 11. Russia’s inflation rate started accelerating last year in response to a plunge in the exchange rate of the ruble that was hit by tumbling crude oil prices and Western sanctions over Russia’s conflict with Ukraine.

Natalia Orlova, chief economist at Alfa Bank, said that the central bank is likely to hold rates again in December, given risks that external shocks may put pressure on the ruble which, in turn, would filter into higher inflation and inflationary expectations. Twenty of 39 economists predicted a cut to 10.5 percent, with the other 19 forecasting unchanged rates, the first time since the surveys started in October 2013 that opinions have been so divided. Even with a rebound since the last rate decision, the ruble has lost more than 35 percent against the dollar in the past 12 months, the world’s sixth-worst performance. This would be the sixth cut this year, and would bring the key rate the level it was at before an emergency increase in December 2014 to 17%, which helped stabilize the plummeting ruble. Future developments in the economy will depend on global oil prices, as well as on its ability to adapt to external shocks, the monetary regulator said.

The moderately tight monetary policy and the weak domestic demand driven by the low growth of the nominal income of the population, help constrain the growth of consumer prices. These still remain on the level which, on the one hand, serves to keep ruble savings attractive and, on the other hand, given sustaining high debt burden and tight creditworthiness requirements, is a factor behind low annual lending expansion. However, the negative demographic trends keep unemployment low, while the labour market is adjusting to the new conditions, largely through a decline in real wages and wider part-time employment. Investment demand is expected to be constrained by limited potential substitution of external finance with domestic one, following the narrow nature of the Russian financial market and high corporate debt load.

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