Interest rates in Russia to stay high as Central Bank fights inflation

Get short URL

Published time: February 06, 2013 11:18
Edited time: February 06, 2013 15:41

The Russian Central Bank. (RIA Novosti / Ruslan Krivobok)

Tags

Banking, Crisis, Currencies, Finance, Inflation , Interest Rates, Investment, Russia

The Central Bank of Russia is between rock and a hard place, as high inflation is leaving no room to ease monetary policy. Both politicians and businessmen say interest rates should be lower to spur economic growth.

Russia’s Deputy Prime Minister Igor Shuvalov says it is high time the Central Bank lowered rates. The key interest rate in Russia could be 1 point lower at 7.25% according to Shuvalov.

Current Russian interest rates are detrimental to GDP growth the Sberbank CEO German Gref said in Davos in January. According to Gref, even with current inflation the Central Bank should be able to lower rates. The head of VTB Group Andrey Kostin also believes gradual easing of rates would stimulate economic growth in Russia, which has slowed following a fall in European demand for oil and gas.

Last September the Central Bank raised all of its key interest rates by a quarter point to 8.25% in a move to tame inflation which stood at 6%. It was the first hike since December 2011.

Inflation in Russia was 6.6% in 2012 and reached 7.1% in January 2013, while the target for the year is 5-6%. The main reasons behind the jump were higher food prices due to a poor harvest last year, and a planned rise in utility rates. At the same time Russia’s GDP growth slowed in 4Q last year to 2.2% compared to 2.9% in 3Q. In 2012 the economy grew 3.4%, down from 4.3% in 2011. In other countries slowing growth is putting pressure on central banks to keep rates low, or cut them – as has been done in Brazil, India and China.

The problem of high interest rates is obvious for the Russian government, large banks, and even for the Central Bank, the Minister of Economic Development Andrey Belousov told journalists last week. The high interest rates affect the investment dynamics, being on the level where they “effectively suppress investment activity of the companies,” according to Belousov.

However, Goldman Sachs experts do not expect that Russia’s Central Bank will change interest rates at its next meeting on February 12, Finmarket reports on Wednesday. Besides the inflation figures they also point to January PMI in Russia, which continued to grow and according to HSBC is equivalent to GDP growth of 4%.

“The rates will stay unchanged, and the government statements are just a message to manufacturers and companies to support their optimism,” Natalia Orlova, chief economist at Alfa-Bank told Finmarket.

On Tuesday the Central Bank of Russia said its decisions on monetary policy depend on the medium-term forecast on inflation. According to the Bank, lowering interest rates is possible if there is a rise in oil prices because of the fiscal cliff in the USA or recession in Europe, as an inflow of money into the economy from oil exports would lower inflation. But a weaker rouble could trigger higher inflation risks that could lead to a further short-term hike of interest rates. However, the Central Bank does not expect a significant weakening of the rouble, nor a hike in world food prices – also one of the main inflation risks.

Deputy CEO of the Central Bank of Russia Aleksey Ulyukaev said in Davos that there is no point using fiscal and monetary stimulation in the economy, as the current level of growth more or less matches the economy's potential. That means the Central Bank can’t actually do much by cutting rates. Monetary regulation is used by central banks all over the world to influence the economy: lower interest rates stimulate economy growth while higher rates reduce inflation.

“Inflation growth makes it less possible that the Central Bank will ease monetary policy in February and even later. However, we expect the inflation forecast will be better by the end of 2Q and by the end of the year the Central Bank might agree to lower key interest rate down by 0.50 points,” Dmitry Polevoy from ING bank said, as quoted by Finmarket.

Natalia Orlova, chief economist at Alfa-Bank believes there are arguments for decreasing rates, but the arguments for increasing are stronger.

“I believe the rates should increase. Manufacturing is not getting more efficient, capital outflow continues, inflation is not slowing. Basel 3 is introduced this year which means that banks will not be able to increase credit at the same pace. There will be a radical cut of budget spending in 2013. All this paves the way for an increase in interest rates. If the Central Bank eases policy and lowers rates capital outflow will speed up,” Orlova said.

Russia’s financial regulator gradually lowered interest rates to the historical low of 7.75% in 2010, but in 2011 it increased the rate several times up to 8%. Last September the Central Bank raised all of its key interest rates by a quarter point to 8.25% in a move to tame inflation which stood at 6%. The Russian maximum key interest rate of 210% was in force from October 15, 1993, till April 28, 1994.

Comments (5)

blasphemousvoice 08.02.2013 14:29

Good call on fighting inflation, in lieu of fake economic growth by artificially lowering rates. In the US rates are so low, that they are willing to do anything to spur economic development at the expense of a crumbling currency. The dollar will be worthless if they keep at it with printing fake money, and encouraging poor investments. Obamas "stimulus" stood at 275 thousand dollars per job created; he would have been better off just giving people money than attempting to be a job creator!

Undo

9ke9 07.02.2013 08:48

And here is a simplified translation of "A Rock and a Hard place" :

Interes t rates at 0 or under , while running a massive debt to GDP, and directly purchasing MBS which are funneled though Equities , doing this with not even bond buying , but just direct inflation of your currency.

Meanwhile, the "confidence" in the monetary system you created is systematically bein g affected by your domestic policy, risking a "currency War" while fightin g multiple foreign invasions to keep it all from falling apart . 1. If you raise interest rates, the paper thin growth and GDP will tank and your Debt will skyrocket, interest on Debt alone will bankrupt you.
2. If you cut spending you risk deepened and prolonged recession as you are a “Monopoly Capitalist” nation most of the work force is employed directly through the government or a corporation directly related to the government.
3. A Spending cut in defense will almost certainly effect your foreign invasions which is the only thing keeping the “confidence” in your monetary instrument.
4 . Raising taxes will risk domestic instability for both the corporations that run the system and for the middle class that has already lost 40% (actually more) in net wealth, a rise in taxes will move GDP offshore and effectively “stop the music” .
5. you raise the 85 billion a month that is going into equities , but alas the final indicator(s) has arrived, numbers of nations are taking action to directly intervene in their Currency ,and key nations are “nationalizing” gold, as your mismanagement and attempt at world domination has finally overflowed and is effecting confidence in your “Reserve status� � currency .
But you know , I’m sure everything will be fine, after all TV said so!

Undo

PR1oh1 07.02.2013 01:59

"Sadly the west could not sell china a box of toothpicks after spending decades insulting the worlds new biggest superpower through the media."
US exports to China have increased 542% over the past 10 years. Last year the exports totaled 103.9 Billion Dollars.In contrast Russian exports to China = 21.3 Billion Dollars.
Do your homework before posting such nonsense.

Undo

View all comments (5)