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Russia’s key rate cut unlikely with high inflation, weak ruble — experts

January 29, 2015, 18:30 UTC+3 MOSCOW
Market players expect some signals of monetary policy easing from the regulator now that veteran banker Dmitry Tulin has replaced Ksenia Yudayeva as the monetary policy chief
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© Artyom Geodakyan/TASS

MOSCOW, January 29. /TASS/. Russia’s Central Bank will keep its key rate unchanged at 17% at its policy meeting on Friday amid soaring inflation and persistent risks for the national currency, according to a consensus forecast of experts polled by TASS on Thursday.

The prospects of the ruble’s further devaluation over the threat of new sanctions against Russia will prevent the regulator from cutting the key rate, despite pressure from banks and business suffering from unaffordable loans, the financiers said.

Meanwhile, market players expect some signals of monetary policy easing from the regulator now that veteran banker Dmitry Tulin has replaced Ksenia Yudayeva as the monetary policy chief and will be present at his first interest rate policy meeting on Friday.

No arguments in favor of rate cut

Economists and bank analysts polled by TASS agreed that the Bank of Russia would keep the key rate at 17% This opinion was shared by Credit Suisse, HSBC, Gazprombank, UniCredit Bank, Alfa-Bank, Metalloinvestbank, Uralsib Bank, B&N Bank, Otkritie Capital and Renaissance Capital.

Russia’s Central Bank hiked the key rate to 17% from 10.5% on December 16 to stem the ruble’s slump and calm the market but now high interest rates are stifling the Russian economy.

"We doubt that the Central Bank can afford to start monetary easing policy now that inflationary expectations are on the rise and there are still fresh memories about the ruble’s recent devaluation," Economist Alexei Pogorelov at Credit Suisse’s Russia office said.

Russia’s inflation accelerated to an annual rate of 13% as of January 26 amid the rapidly depreciating ruble, compared with slightly over 9% in early December, according to data provided by the State Statistics Service (Rosstat).

The ruble has slumped by 18% versus the dollar since the regulator’s latest interest rate policy decision to 68.86 from 58.3. The ruble has come under increasing pressure in the wake of falling oil prices and a recent decision by international rating agency S&P to cut Russia’s sovereign rating to the speculative grade.

The ruble was trading as low as 68.79 on the Moscow Exchange at the latest.

Russia’s Central Bank said in January it would cut the interest rate only in case of "a steady trend towards lower inflation."

There is no such trend at present, Credit Suisse said.

Inflation will test new levels in the next few weeks and come close to 17%, which is the level of the regulator’s key rate, Uralsib Capital Analyst Irina Lebedeva said.

"I don’t see any signal for a rate cut now," she said. The risks of further inflation growth and the ruble’s devaluation still persist and, therefore, "there is no sense in cutting the rate now just to raise it again on March 13 [the date of the regulator’s next interest rate policy meeting]," she added.

The Central Bank’s rate decision will be uneasy in the current environment, Director for Currency and Money Market Operations at Metalloinvestbank Sergei Romanchuk said.

"This will be a very interesting session: the intrigue over the key rate change is growing. On the one hand, pressure is seen from business and the banking community to have a lower rate. On the other hand, the interest rate was hiked due to the exchange rate’s slump and the desire to halt it," the expert said.

These factors have not been exhausted and will exert restraining influence on the regulator, Romanchuk said.

In addition, geopolitical factors are again coming to the foreground, as was the case in March 2014 when Russia’s Central Bank switched to the policy of raising the key rate amid the escalating Ukraine crisis.

As the situation in east Ukraine has grown tense, Western countries have restarted talks on new sanctions against Russia, including possible disconnection of Russian banks from the SWIFT international bank transaction system, as well as broader restrictions for Russia’s oil and financial industries, the news agency Reuters reported on January 28.

"The probability of new sanctions is, undoubtedly, an argument against reducing the rate," Lebedeva from UralSib Capital said.

Signal of "inevitable policy easing" from Tulin

Experts do not expect the Central Bank to change its key rate but wait for hints at monetary policy easing.

"A meeting of the Bank of Russia Board of Directors will draw much attention, first of all, because Dmitry Tulin will replace Ksenia Yudayeva," said Pogorelov from Credit Suisse.

"After studying the details of his life and professional experience, the market considers his appointment to the Central Bank as a signal of inevitable policy easing," the expert said.

Tulin’s appointment is his third return to the Central Bank. He worked as the Central Bank Deputy Governor in 1991-1994 and in 2004-2006 (he was responsible for bank supervision in the 2000s).

Tulin worked as Vneshtorgbank’s Management Board Chairman in 1996-1999 and as Senior Counselor at the European Bank for Reconstruction and Development in 1999-2004. After 2006, he worked as a partner at the auditing firm Deloitte.

The regulator’s monetary policy will not change with Tulin’s appointment, Central Bank Chief Elvira Nabiullina said earlier. "I want to emphasize that we’ll keep both strategic and tactical monetary policy guidelines and the monetary policy ideology will be consistent with how we worked in 2013 and 2014," she said at the time of Tulin’s appointment.

However, some government officials and market players, including presidential aide Andrei Belousov and Chairman of the MDM Bank Supervisory Board Oleg Vyugin, said they expected changes from Tulin in the regulator’s monetary policy.

The launch of new concessional liquidity provision instruments may come as an alternative to the rate cut, experts said.

"It is not ruled out that the regulator may decide to introduce long-term instruments that will be cheaper than the current key rate and possibly some rules will be relaxed for lending against the pledge of credit institutions’ guarantees," Director of the Center for Macro-Economic Forecasting and Investment Strategy at B&N Bank Mikhail Gonopolsky said, adding these instruments were required already now.

Hopes for spring

Experts generally expect the regulator to cut the key rate on March 13, its first policy meeting in spring, which will be followed by a briefing of the Central Bank’s top managers on monetary policy.

"If the Central Bank sees inflation to behave in a way different from now by March, then there are chances for some policy easing in March. But there are no such signs at present yet," Gonopolsky from B&N Bank said.

His opinion was shared by Lebedeva from UralSib Capital. Meanwhile, Deputy Director of the Center for Economic Forecasting at Gazprombank Maxim Petronevich said the regulator could relax its monetary policy only in May.

Russia’s Economic Development Minister Alexey Ulyukayev said earlier the 17% rate was "extremely high" and should be reduced in the first three months of 2015.

Former Russian Finance Minister Alexey Kudrin, on the contrary, said the Central Bank’s key rate might be lowered at the end of the first quarter or at the beginning of the second quarter of 2015 "at best."

"As long as there are expectations of a further slide in oil prices and the ruble’s further depreciation, the rates have to remain high," he told Business FM radio station.

According to Kudrin, the rate at 17% should restrict the receipt of loans issued by the regulator so that this money stayed away from the currency market. "As long as there are expectations of a lower exchange rate, the interest rate should be high," the former finance minister said.

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