Black Friday is Now! Don’t miss out on up to 60% OFF InvestingProCLAIM SALE

UPDATE 2-Russia holds rates, sees no change; economy fragile

Published 09/28/2010, 05:21 AM

* Says inflation risks still acceptable

* Global backdrop threatens domestic recovery

* Rates may stay on hold in next few months

* Central bank makes no reference to under-fire rouble

(Adds analyst comments, data)

By Toni Vorobyova

MOSCOW, Sept 28 (Reuters) - Russia's central bank said on Tuesday it may hold interest rates at record lows for a few more months as it tries to boost a fragile economic recovery while insisting inflationary pressures remain in check.

The bank kept the benchmark refinancing rate unchanged at 7.75 percent, in line with expectations, saying that despite a drought-related spike in food prices, "inflationary risks, defined by monetary conditions, remain at an acceptable level".

"The current parameters of monetary policy are thought by the Bank of Russia to ensure an acceptable balance between main macroeconomic risks in coming months," the central bank said.

The measured tone caught some analysts by surprise after central bank chairman Sergei Ignatyev said last week that the drought's impact could last until next autumn and 2010 inflation could reach 8 percent -- a full percentage point more than had been forecast at the start of September.

"I had expected them to start to turn around their language towards admitting that the pick-up in inflation is moving out of the boundaries of just the food sector," said Alexander Morozov, chief economist for Russia at HSBC.

"I had also expected that the language about (rates being on hold) in coming months would be excluded from the text."

Most analysts polled by Reuters before the central bank's decision said they expected it to keep money rates on hold until the end of the year.

Consumer prices rose 0.6 percent in the first 22 days of the month -- compared with zero inflation in September 2009 -- as the worst drought in decades reduced the grain harvest by a third.

M2 money supply, meanwhile, rose 32.8 percent year-on-year in August, central bank data showed on Tuesday.

The central bank made no reference to the rouble exchange rate or the potential inflationary impact of the currency's steep drop to multi-month lows in recent weeks.

"The weakness of the rouble may have an extra stimulating impact on prices through pushing up import costs," Morozov said.

The rouble showed little immediate reaction to the central bank's decision and statement, trading at 35.28 against its currency basket by 0728 GMT. Russia's MICEX stock index lost 0.8 percent, tracking global bourses lower.

FRAGILE ECONOMY

A key reason for keeping rates on hold is the still fragile health of the domestic economy, which is recovering from its worst recession in 15 years.

"An increase in uncertainty in the development of the external economic situation creates additional risks for the stable growth of the Russian economy, which means it is necessary to retain a stimulating monetary policy in order to support internal growth factors," the central bank said.

Russia's dependence on exports of oil, gas and metals make it especially vulnerable to swings in the global cycle.

"There is a feeling that the central bank still sees the need to keep the current monetary policy to support lending growth," said Maria Pomelnikova, economist at Trust.

The drought -- and the record heatwave which caused it -- took their toll on domestic activity, although the Economy Ministry expects growth to return in the autumn after gross domestic product (GDP) shrank a seasonally adjusted 0.4 percent in August, month-on-month.

Many analysts now expect the central bank to start raising rates in the final months of this year or in early 2011.

"It will be interesting to hear the central bank's rhetoric after September inflation, when it will be clear how its pace has been affected not just by the food component but by the part that depends on monetary factors," said Vladimir Kolychev, analyst at Rosbank. "That could demand some kind of action."

One possible option open to the central bank would be to start raising banks' reserve requirements rather than rates, he added. (Additional Reporting by Andrey Ostroukh; editing by Tim Pearce)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.