Friday, March 15, 2013

Russia holds rate steady, says rise in inflation poses risks

    Russia's central bank held its benchmark refinancing rate steady at 8.25 percent, as expected, saying the rise in inflation was expected and poses risks while economic growth is continuing to slow down.
    The Bank of Russia, which raised its rate by 25 basis points in 2012 and is under pressure to cut rates to boost growth, warned that if inflation remains above target for a prolonged period it may affect expectations and thus poses risks, in particular in light of planned increases in the tariffs of monopolies.
    However, the central bank omitted last month's phrase that the risk of a significant slowdown from tighter monetary conditions were considered minor, indicating a slightly less hawkish stance.
    Russia's inflation continued to climb in February, hitting an 18-month high of 7.3 percent, up from January's 7.1 percent.
    The central bank repeated that it expects inflation to exceed its 5-6 percent target in the first half of 2013 due to higher food prices and certain regulated prices.
     In 2012 prices rose 5.1 percent and the central bank targets 4-5 percent inflation in 2014.

     The Bank's Chairman Sergey Ignatiev has lead a dogged campaign against inflation which started accelerating in mid-2012 after easing in the second half of 2011. Ignatiev is retiring in June and is being replaced by Elvira Nabiullina, economic aide to Russian President Vladimir Putin.
    "The dynamics of the key macroeconomic indicators in January 2013 point to a continuing slowdown in economic growth," the central bank said, adding that investment in productive capacity was subdued, retail sales decelerated and industrial output decreased.
    At the same time, economic confidence remains positive and labor market conditions, along with credit expansion, is providing support to domestic demand, the bank added.
     Russia's Gross Domestic Product rose by 0.6 percent in the third quarter from the second for annual growth of 2.9 percent, down from the second quarter's 4.0 percent rate. In 2012 the economy expanded by 3.4 percent.
     It is the weakest growth rate since 2010 and economists expect the bank to start cutting rates after inflation begins to ease over the next few months.
    The appointment of a Putin ally as new bank president has further stoked these expectations with some economists expecting the bank to cut rates sooner rather than later.


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