Today’s business daily Vedomosti reports that the Russian Central Bank decided to leave the base refinancing rate unchanged at 8.25 percent and moved to introduce a single mandatory reserve rate of 4.25 percent for all categories of lending. Before the Central Bank’s decision, provisioning requirements for ruble-denominated loans to citizens differed from those for corporate lending – the former being at 4 percent, while the latter was set at 5.5 percent.
The new measure will become effective in the period between March 1 and April 1, 2013. The Central Bank claims that the measure will be neutral to the banking sector and that it does not represent any change in direction of its monetary policy. Due to increased flexibility in exchange rate formation, as well as considering internal and external macroeconomic tendencies, the mandatory reserve requirement mechanism lost a great deal of its importance, the Central Bank says.
As far as the refinancing rate is concerned, the Central Bank stated that it considered inflationary risks and perspectives for economic growth before deciding to leave the rate unchanged. Raiffeisenbank’s analysts believe that the Russian Central Bank will not reduce the rate before March. Experts did not expect the Central Bank to change the refinancing rate at its today’s Board meeting, as the inflation registered in February on a year-on-year basis exceeds the Central Bank’s target figure by 1 percent – instead of desired 5-6 percent, the annual inflation in Russia is currently at 7 percent. The Central Bank acknowledges that the inflation exceeded its target rate and quoted food and transportation prices as the main culprits. However, last week the Vice President of the Central Bank Aleksei Ulyukaev expressed a degree of optimism regarding inflation, stating that it will reach its peak in February and return to the targeted range by the 2nd quarter of 2013. He backed up his expectations with figures indicating a slow growth of money supply as a consequence of lower credit demand.
Today’s Novaya Gazeta reports on the recently published data by the Russian Statistical Bureau, indicating that the industrial output grew by a mere 2.6 percent in 2012, which is less than the Ministry of Economy’s humble projection of 3.2 percent. What is more interesting is that the Russian Central Bank, known for its resistance towards loosening of the monetary policy, changed its views and does not exclude the possibility of changing its interest rates.
Industrial output grew by 1.4 percent year-on-year in December 2012, down from 1.9 percent in November and 2.5 percent in December 2011. Independent analysts confirm the negative tendency, stating that some sectors of industry still did not catch up to the pre-crisis levels – for example, manufacture of machinery and equipment in 2012 was 13.1 percent lower than before the 2008 crisis. On the other hand, oil and gas extraction, as well as production and supply of electricity and gas, surpassed their pre-crisis levels by 5.7 and 6.6 percent, respectively, thus lifting the overall industrial output to 2 percent above its pre-crisis level. However, such developments only increase Russia’s dependence on its oil and gas sectors. Industrial optimism index, developed and published by the Gaidar Institute for Economic Policy, fell to its three-year minimum in January 2013, indicating that it would be unrealistic to expect an increase in fixed capital investments in the immediate future.
Considering the recently published data on the Russian industrial output, it might be more than a coincidence that the Russian Central Bank changed its rigid attitude towards changes in monetary policy. Alexey Ulyukaev, Deputy President of the Central Bank, stated that the Central Bank allows the possibility of changing interest rates depending on the complex developments in the international environment. Only a week ago, Ulyukaev was quoted saying that the reduction of interest rates would be counterproductive and lead to increased risks in various sectors of the economy. At the same time, the Central Bank decided to keep its base refinancing rate at 8.25 percent (the history of Central Bank’s monetary measures can be found here. The Central Bank remained indifferent even to President Putin’s statement on the necessity to provide cheap long-term funds for the development of the economy. His request might have been contradictory in a sense that it called for a low inflation as well, which currently seems to be the main concern of the Central Bank. Ulyukaev stated that the year-on-year inflation at the beginning of 2013 could increase to 7 percent, higher than the desired target of around 6 percent. Analysts don’t expect the Central Bank to change its monetary policy anytime soon, as the risk of higher inflation currently outweighs the risk of an economic slowdown. With all this taken into account, Russian analysts expect that the industrial output will grow by about 1 percent in 2013.
Today’s Vedomosti.ru report that the Russian Central Bank sold 5.2 billion rubles (USD 169.4 million) on January 9, the first day of trading in 2013. The intervention was caused by the sliding of the USD/RUB rate to below 30.5. This is the first intervention by the Central Bank since November 19, 2012 and the first time it intervened to lower the ruble exchange rate since May 2012. After the initial strengthening of the ruble, which is attributable to traditionally lower imports in January, analysts believe that the FX market will remain quiet during the first quarter of 2013.
The Central Bank did not intervene in the market recently as the exchange rate of the EUR-USD currency basket remained within the targeted range, which the analysts believe to be between 34.65-35.65 rubles (currently trading at 34.54 rubles). The Central Bank defines a wider allowed range for the EUR-USD currency basket, the so-called operational interval, which is between 31.65-38.65 rubles. Central Bank’s recent absence from the currency market is believed to be a step towards the full liberalization of the exchange rate and shifting the focus towards inflation targeting.
The ruble exchange rate was spurred by the liberalization of the state bonds market introduced in November, which led to an increased demand for ruble-denominated government securities. 10-year Russian government bonds yield 6.75 percent, which is a very attractive yield considering the stable exchange rate and the extraordinarily low level of central government debt. Starting from January 8, the Moscow Exchange pushed the closing of its currency exchange from 19:00 to 23:50 Moscow Time. However, the Central Bank’s presence in the currency market will remain the same – from 10:00 to 19:00 Moscow Time.
Kommersant.ru reports that the inflation in 2012 was one of the lowest in Russia’s history. According to the preliminary data published by the Russian Statistics Bureau, consumer prices increased by 6.6 percent in 2012. The Government planned to keep the inflation at the all-time low of 6 percent (already registered in 2011), but the plan was spoiled by increased food prices due to a bad harvest. Economic slowdown, loosened exchange rate policy and budgetary restrictions helped keep the inflation within reasonable limits and provided hopes for its further reduction in 2013.
Inflation picked up the pace at the end of the year as a result of increased demand for food products and increased energy consumption due to extremely cold weather, which translated into higher prices for services. On the other hand, prices for non-food items increased by only 0.3 percent in December, which is their lowest monthly increase in 2012. Deputy Minister of Economy Andrey Klepach noted that the citizens are increasingly turning towards savings, and the traditional interest rate increase on deposits at the end of the year only strengthened that tendency. The first quarter of 2013 will show whether this is a temporary occurrence or the beginning of a trend that could bring the inflation even lower. In addition, it seems that the Russian Central Bank prefers price stability to unconditional economic growth. Mr. Alexei Ulyukaev, Deputy President of the Russian Central Bank, stated in mid-December that he expects the inflation to return to the Central Bank’s target of between 5 and 6 percent in the second quarter of 2013.