Russian Central Bank expected to leave key rates unchanged at Aug 9 meeting
MOSCOW. Aug 8 (Interfax) - The board of directors of the Central Bank of Russia (CBR) will probably leave key interest rates unchanged at its meeting on August 9, most bank analysts polled by Interfax believe.
At its previous meeting on July 12, the CBR board left the refinancing rate - currently 8.25% - and other interest rates on its operations unchanged. At that time the CBR announced that on July 29 it would hold the first auction to extend loans secured by assets or guarantees at a floating interest rate for 12 months. In the auction, it lent out 306.8 billion rubles of the offered 500 billion rubles at a cut-off rate of 5.75%.
The slowdown of annual inflation to 6.5% in July from 6.9% in June and signs of an economic slowdown, such as HSBC's PMI index for Russia, which fell below 50 points in July for the first time since August 2011 to 49.2 from 51.7 in June, could be arguments in favor of a rate cut. But analysts point to the fact that inflation is still higher than the target of 5-6%, and a rate cut could trigger a deterioration in the situation on the forex market.
Alfa Bank analyst Dmitry Dolgin believes rates will not be changed, despite slower inflation. "The importance of the inflation argument will not be high in making the decision. There is currently nervousness on the forex market due to the external backdrop and the internal weakness of the balance of payments. A rate cut in these conditions could lead to big costs on the forex market, so we doubt that there will be a rate cut," Dolgin said.
ING economist for Russia Dmitry Polevoi believes the CBR will refrain from cutting rates until September. Inflation is still above 6%, though it could fall below this threshold by the end of August - early September, he said. "We believe that in August the CBR will probably still prefer to wait, and subsequently it will look both at the outlook for inflation and the situation in the economy," Polevoi said.
ING's current forecast projects a rate cut of 25 basis points in September and another cut of 25 basis points by the end of the year, Polevoi said.
However, he said the CBR might hold another auction with a floating rate in August. "The Central Bank might prefer to continue increasing money supply through the new instrument - refinancing banks at a floating rate. Considering that in the first auction banks took less than expected, the potential remains fairly great," Polevoi said.
Morgan Stanley analysts also expect the CBR to leave key rates unchanged at Friday's meeting, with inflation still above the target. However, the CBR might take further steps to ease policy by providing additional liquidity, such as a new auction for funding at a floating rate, they believe.
As soon as inflation gets back on target, which should happen in September, the CBR will continue easing by lowering key rates, with a first cut of 25 basis points in September and a total of 50 basis points by the end of the year, the bank forecast in a report.
Goldman Sachs analysts also do not expect a rate cut Friday. They said in a report that they continue to believe that the CBR does not have any room to ease monetary policy amid the current relations of inflation and economic growth. They expect inflation in Russia to slow to the targeted 5-6% by the fourth quarter of 2013.
However, HSBC chief economist for Russia and the CIS, Alexander Morozov believes the CBR will cut rates on Friday, though before the bank believed the pause in rate changes would be longer. He believes the CBR will cut rates by 25 basis points on Friday and by another 25 basis points in October, when inflation is expected to return to the targeted range of 5-6%.
He said the situation has changed fundamentally in the past month, particularly the state of the economy. "While a month ago the economy was growing, data for July that have come in so far indicate a steep increase in the threat of a recession," Morozov said. Inflation, meanwhile, continued to slow and there has been a "slowdown in the structural part of inflation," which bolsters optimism that it will slow further, he said.
He said a counter argument could be concerns that a rate cut could have a negative impact on the ruble. On the other hand, a rate cut could attract foreign investment in OFZ federal bonds, which could even strengthen the ruble, Morozov said.
Analysts at Credit Suisse believe that the CBR will lower the rate for repo transactions on Friday. They said in a report that the continued slowdown of inflation favors an easing of policy and they expect the rate on one-week repo transactions to be cut by 25 basis points on Friday from the current 5.5%. They believe the CBR should be more aggressive and start cutting rates as quickly as possible. They expect inflation in Russia to slow to 5.4% by the end of the year.
