With double risk

The Central Bank is ready to tighten monetary policy

The Board of Directors of the Bank of Russia has maintained key interest rates: the refinancing rate is still 7.75% per annum, and the minimum one-day auction repo rate is 5%. But already this year or early next year, the regulator will have to raise rates, at the risk of provoking an unwanted strengthening of the ruble, experts say.

As noted in the Central Bank’s message, “the decision was made taking into account trends in the dynamics of key macroeconomic indicators and the situation in the domestic financial markets.” According to the regulator, “inflationary risks caused by monetary conditions are at an acceptable level.” The Central Bank also noted an improvement in a number of indicators of industrial activity and investment in August, but drew attention to signs of unstable economic growth. “Employment indicators remained the same, which, taking into account the continued growth of real incomes of the population, creates conditions for a further revival of domestic demand,” the Central Bank said in a statement. “At the same time, the increased degree of uncertainty in the development of the foreign economic situation creates additional risks for the sustainable recovery of the Russian economy, which determines the need to maintain a stimulating monetary policy to support domestic growth factors.”

Analysts noted that since the inflation forecast increased from 7 to 8%, the Central Bank will have to think about raising the rate. “The acceleration of inflation that we are seeing now is fundamentally caused by monetary factors, and the drought acted only as a trigger and aggravated this trend,” notes Vladimir Osakovsky, head of the department of macroeconomic analysis and research at UniCredit bank. -- In particular, the money supply in Russia grew throughout the year and accelerated to more than 30% in the second quarter. In this regard, we believe that accelerating inflation requires tightening the monetary policy of the Central Bank, in particular, raising rates in the near future. However, we expect that rate increases will begin only next year or at the end of December this year, since the Central Bank is currently likely to try to support weakening economic growth.”

The head of the analytical department of the Arbat Capital Investment Company, Sergei Fundobny, believes that the regulator may well take the first step towards tightening monetary policy in the fourth quarter of this year and increase the refinancing rate by 0.25 percentage points. “After this, a pause will most likely be taken in order to assess the consequences of this step, which will primarily have a signaling effect,” the expert notes. -- If priority is given to fighting inflation, then we can expect a further increase in the refinancing rate in 2011, which, naturally, will put an end to hopes for rapid credit growth and restoration of economic activity outside the commodity sector. If priority is given to stimulating the economy, then the Central Bank will have very little room to raise rates. In this case, we can expect a further acceleration of inflation in the first half of 2011.”

Eva Bogova, an analyst at the Broco group of companies, believes that considering changes in the interest rate as a factor influencing the inflation rate is currently inappropriate for a number of reasons. The rise in inflation is most likely a consequence of the dry summer and rising prices against the backdrop of rush demand. So, in the absence of a reason fueling inflationary processes, the consequences of consumer demand themselves will gradually weaken, and after 9-12 months they will actually cease to influence price increases, she notes. In addition, an increase in the interest rate will create the preconditions for the strengthening of the ruble, and this is very undesirable for the economy, since it makes Russian products uncompetitive. Therefore, Ms. Bogova believes that we can expect an increase in interest rates only in four to six months. In her opinion, nothing threatens the ruble: “In the current situation, we can rather talk about a very mild devaluation of the ruble relative to the bi-currency basket within 5-7% of the current exchange rate.”

However, some analysts predict a devaluation of 15-20%. “We assume that delaying the tightening of the Central Bank’s monetary policy is a negative factor for the ruble, which is already under pressure from the continuing deterioration of the foreign trade balance,” notes Mr. Osakovsky. At the same time, he does not believe that the regulator will conduct large-scale foreign exchange interventions: “The ruble is still far from reaching those levels that the Central Bank considers critical.” According to expert forecasts, by the end of the year the ruble will drop to 35.5 rubles. to the bi-currency basket, which consists of 0.55 dollars and 0.45 euros. Yesterday the ruble reached 35.3 rubles. to the basket.

Nikolay KOCHELYAGIN