FXstreet.com (Barcelona) - Liza Ermolenko, Emerging Markets
Economist at Capital Economics notes that the Central Bank of
Russia left its benchmark interest rates on hold this morning as
was widely expected.
She continues, "More importantly, the tone of the accompanying
statement reveals that the Bank has become increasingly worried
about the recent economic slowdown and may start easing policy in
the coming months."
She adds that the Central Bank's (CBR's) decision did not come as a
surprise. Both she and the consensus had expected the benchmark
refinancing interest rate to be kept on hold at 8.25%, and
overnight repo and deposit rates at 5.50% and 4.50% respectively.
Over the past few months the CBR's attention has started to shift
away from concerns over high inflation and towards fears of an
economic slowdown. But the dovish tone of today's accompanying
statement was still surprising.
She writes, "For a start, the CBR emphasised that, although
inflation still "exceeds the target range", it is being driven by
"higher growth rates of food and passenger transport services
prices", while core inflationary pressures subsided in December.
What's more, the statement seems to attach a much greater weight to
the "gradual cooling of economic activity". November's data showed
that investment collapsed and growth in industrial production and
retail sales remained well below its rates at the start of last
As such, she now feels that it is almost certain that the CBR will
start easing policy over coming months. She notes too that in
today´s statement, the Bank dropped the phrase "the current level
of money market interest rates is appropriate for the near future".
Alexey Ulyukayev, the CBR's first deputy chairman, previously
hinted that this phrase meant that rates would be kept on hold at
the following meeting. When the phrase was last dropped in August,
this was followed by a rate hike in September.
Back them Ermolenko argued that it would not take too long for
September´s hike to be reversed. Afterall, she had expected the
slowdown in the Russian economy to deepen, while the CBR saw it as
a temporary blip. She writes, "As it happens, growth slowed even
sharper than we had anticipated, to 2.9% y/y in Q3 and further to
around 2% y/y by end-2012, down from growth rates of close to 5%
y/y at the start of the year."
Ermolenko sees that the shift in the CBR's tone of communications
has also happened faster than even she had expected. Whereas she
had thought that inflation would need to start falling (probably in
Q2) for rate cuts, today's statement suggests that if economic data
over the coming months disappoints, the Bank may be prepared to
start easing policy even earlier. All told, she expects rates to be
cut by 25bp over the coming months, possibly as soon as in February
or March. Q4 GDP data due to be released at the end of January,
could be one trigger for rate cuts."
Looking ahead, she thinks that growth will remain lacklustre for
some time and high inflation should continue to erode household´s
real incomes, hitting consumer demand, the key driver of Russian
growth. She finishes by writing, "All told, we have pencilled in
GDP growth of just 2% for this year. This, coupled with a drop in
inflation, as the effects of last year's food price shock and the
postponement of utility tariffs hikes start to unwind by the second
half of this year, means that rates may be cut by a total of 50bp