Tuesday, April 2, 2013

Russia holds key rate, cuts long rates, concern for growth

  Russia's central bank held its benchmark refinancing rate steady at 8.25 percent, but trimmed some of its long-term liquidity provision rates and underlined its concern over slowing economic growth, a clear signal that it is getting ready to ease its policy stance.
    The Bank of Russia, which raised its refi rate by 25 basis points in 2012 but is facing pressure to cut rates to boost growth, acknowledged that inflation remains above its target and this could fuel inflation expectations.
    However, the central bank said it expects inflation, which has increased due to higher food prices and administered prices, to return to its target in the second half of this year.
    "The dynamics of the key macroeconomic indicators in February 2013 point to a continuing deceleration of economic growth and increased risks of the economy slowing down," the bank said.
     The central bank's reference to increased risks of economic slowdown is the latest sign that it is preparing to ease policy. Last month the central bank also noted the slowdown in economic growth but dropped its earlier phrase that the risk of a significant slowdown from were minor.
    "In making monetary policy decisions, the Bank of Russia will be guided by the inflation goals and economic growth prospects," the bank added after a meeting of its board.

      It noted that investment in production capacity remained subdued and the decline in the growth rate of retail sales and industrial production continued.
    "Against this background, economic confidence indicators are gradually deteriorating," the bank said, a contrast to last month when it said economic confidence remained positive.
    It added that labour market conditions and credit were still supporting domestic demand.
    Russia's Gross Domestic Product expanded by 0.6 percent in the third quarter from the second for annual growth of 2.9 percent, down from 4.0 percent in the second quarter.
    Last month the government said GDP in February rose by an annual rate of 0.1 percent.
    While the Bank of Russia held its refinancing rate steady, it cut its repo rate on 12-month standing facilities by 25 basis points to 7.75 percent and all loans secured by gold by 25 points. Some of the rates on open market operations were also cut by 25 basis points.
    The bank said these cuts would not have any significant impact on money market rates but would bring the cost of obtaining liquidity from the Bank of Russia closer to its main liquidity provision rates, "which will contribute to strengthening the interest rate channel of the monetary policy transmission mechanism."
    Russia's inflation rate rose to 7.3 percent in February, continuing its nine-month rising trend, but the bank said the annual inflation rate was projected at 7.2 percent as of March 25.
   The central bank said last month that it expects inflation to exceed its 2013 target of 5-6 percent in the first half 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 of Russia's Chairman Sergey Ignatiev has lead a strong 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.
    Most economists had expected the central bank to keep rates steady this month though some had expected it could start cutting rates this month due to its forecast of lower inflation.



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