Friday, July 12, 2013

Russia holds rate, repeats risks of economic slowdown

    Russia's central bank maintained its policy rate at 8.25 percent, as expected, along with its outlook, saying that "the risks of further economic slowdown remain given the weak investment activity and the sluggish recovery in external demand."
    The Bank of Russia, which last cut rates in September 2012, added that it would "continue to monitor inflation risks and the downside risks to economic growth," indicating that a rate cut is not immediate.
   Although economic growth remains low, the bank said the fall in the growth rates of some indicators in May was partly due to calendar effects and "labour market conditions and credit dynamics are still providing support to domestic demand."
    While economists had expected the Bank of Russia to hold rates steady, the outcome of the meeting was highly anticipated because it was the first board meeting chaired by the new governor, Elvira Nabiullina, former aide to Russian President Vladimir Putin. Nabiullina took over from Sergei Ignatyev who retired after 11 years as governor.
    While the central bank's economic outlook was a replica of its June statement, it dropped the warning that inflationary expectations could be affected if inflation remains high for a prolonged period.

    Another change during Nabiullina's first meeting was that the board now provides an exact date for its next meeting compared with a more vague indication in the past, and added a new instrument to its tool box for providing funds to banks.
    Beginning next week, the Bank of Russia will provide banks with funds, secured by non-marketable assets and guarantees, for 12 months with a floating interest rate at 5.75 percent. By reducing the market collateral held by the central bank, this should improve the efficiency of the interbank market.
    "The conduct of the longer-term operations with floating rate will contribute to intensifying the monetary policy signal as the changes in interest rates will be transmitted to the change of the cost of funds, previously provided by the Bank of Russia to credit institutions," the central bank said.
    Russia's inflation rate fell to 6.9 percent in June from 7.4 percent in May, but was still above the central bank's target range of 5-6 percent.
    As of July 8, inflation was estimated a 6.6 percent, the bank said, adding that core inflation in June was 5.8 percent.
    The central bank repeated that it still expects inflation to return to its target range in the second half of the year, barring any adverse food price shocks.
    Russia's economy shrunk in the first quarter with the Gross Domestic Product falling 0.07 percent from the fourth quarter for annual growth of only 1.6 percent, down from 2.1 percent in the fourth quarter and the fifth quarter with a declining growth rate.
    In June, Nabiullina said in an interview with Reuters that interest rats could be cut in the third quarter of this year but only if inflation is clearly falling.


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