Central bank of Russia moves on deposit rates but leaves refinancing as is

The Central bank of Russia has held off on lifting the key refinancing rate while announcing a 25 basis point increase in deposit rates from December 27.

­The Central bank said in a statement that moving the deposit rate higher would not significantly raise lending costs, but would help reduce volatility of market interest rates. It added that the refinancing rate would remain at its historic low of 7.75% to support the economic recovery.

However, Alexandra Lozavaya, deputy head of the analytical department at Investcafe, says the the refinancing rate is highly likely to go up during 1H 2011, to head off inflationary pressure.

“The FY 2010 inflation should reach 8.3%-8.5%. I expect the refinancing rate of the CBR to increase to 8% in 1H 2011. It’s not impossible that the rate will go up to 8.25% by the end of 2011, should the authorities prove unable to tackle inflation.

The economy is already signaling that the rise of interest rates is highly likely in the near future. Yields on government bonds have increased, which was followed by growing municipal and corporate securities.”