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Russian rate stays put despite worries of inflation

Russian rate stays put despite worries of inflation
The Central Bank of Russia (CBR) has decided to keep its key interest rate at 8%. While the sound economic growth in the country allows that, experts warn growing inflationary risks may push the rate higher at some point in 2012.

The Russian regulator gave the typical explanation for its decision, saying it “was supported by the assessment of inflation risks and economic outlook, taking into account the increased global economic uncertainty and it is neutral in terms of monetary policy stance.”

Macroeconomic risks for Russia seems to be really minor, at least compared to the majority of debt – ridden economies in Europe. This doesn’t call for the need to stimulate businesses with cheaper lending.

The World Bank improved the outlook for the Russian economy on Wednesday, saying GDP should grow 3.8% in 2012 – up from the previously forecast 3.5%. Again it was high oil that underpinned the optimism, with the Bank warning against its fragile nature. Weak production capacities could limit the growth, it said.

The other supporting factor – low inflation – is also quite vulnerable. Despite the fact it has so far remained quite low in 2012 – at 3.7% in annual terms as of June 9 – it should speed up significantly in the second half of 2012.

“The planned increase in the majority of regulated prices and tariffs in July as well as a fading disinflationary effect from food prices will result in the consumer prices growth in the second half of the year, thus contributing to the return of the inflation back to the target range for 2012,” the regulator explained.

Ekaterina Kondrashova, an analyst at Investcafe, says growing prices may force the regulator to lift the rate at some point during the year. But it isn’t likely to happen too quickly and it will take CBR two months at least to asses the possible scale of price rises, as well as its economic effect, Kondrashova concludes.

Remaining global economic uncertainty comes as another constraining factor, added Aleksey Moiseev, head of the macroeconomic analysis department at VTB Capital, talking to Business RT.

“I don’t believe that in the current very fragile external environment the Central Bank is going to deliver a rate hike, but obviously it’s likely to continue its warning policy,” he said.

The refinancing rate in Russia has remained unchanged since the start of 2012. The latest revision came in late December 2011, when the regulator cut the cost of lending 0.25% in an effort to boost economic growth.