Russia holds rate, warns of rises if inflation accelerates

    Russia's central bank maintained its key policy rate at 5.50 percent, but warned that it is ready to raise rates if there signs that inflation will exceed the bank's target of 5.0 percent by end-2014.
    The Bank of Russia said it still expects the downward trend in consumer price inflation to continue and inflation to converge toward its target by the end of this year as output is expected to remain below the economy's potential due to the slow recovery of external demand and weak investment activity while the impact of a recent rise in food prices also unwinds. A slow growth of overall monetary aggregates should also help contain inflation this year.
    Although Russia's headline inflation rate eased to 6.1 percent in January on lower food prices, the central bank noted that inflation had risen to 6.5 percent in December, with 0.5 percentage points of that increase due to higher prices of fruits and vegetables along with some milk and poultry products.
    "If the negative impact of these factors spills over to the prices of a wide range of goods and services and to household expectations, the possibility of inflation deviating from the mid-term targets will increase. In this case, the Bank of Russia will be ready to tightens its monetary policy."

   The central bank acknowledged that the impact of the ruble's deprecation and the factors behind  higher prices at the end of last year represented "a major source of uncertainty" for its forecast.
    The Russian ruble started weakening against the U.S. dollar in February last year and fell until early September before it rebounded. But in late October it again started to decline for a 7.1 percent fall in 2013. The sharp depreciation continued in January, along with many other emerging market currencies, but this month the ruble has bounced back along with other currencies.
    So far this year, the ruble is down by 6.2 percent against the dollar, trading at 35.07 today, a level that has not been seen since March 2009 in the midst of the global financial crises.
   Amid January's currency selloff, the central bank on Jan. 30 pledged to launch unlimited interventions in the foreign exchange market if the ruble strays outside its target corridor.
    Since 1999, the central bank has operated a managed floating exchange regime and plans to let the ruble float freely in 2015. Under the current regime, the central bank intervenes when the ruble approaches the boundaries of a seven ruble corridor against a dual-currency basket of currencies that comprises 55 percent U.S. dollars and 45 percent euros, a proxy that reflects Russia's trade relations.
    Russia's economic growth remains sluggish with Gross Domestic Product expanding by only 1.2 percent in the third quarter from the same 2012 quarter, steady from the pace in the second quarter, as industrial output continues to stagnate.
    Russia's statistics office has estimated growth of 1.3 percent in 2013, below the government's 1.4 percent forecast. This year the government has forecast growth of 2.5 percent but the economics ministry has already questioned whether that can be achieved.
    Weak investment activity is caused by overall economic uncertainty and low profits and consumer demand remains the main driver of growth due to growth in retail lending and wages, the bank said.
    "Demand for bank loans has not demonstrated any growth amid the slack in economic activity," the bank said, adding that it does not consider the lack of lending dynamics to be restraining growth.
    The central bank, which is moving to an inflation-targeting regime and introduced the one-week repo rate on auctions as its "key" rate in September, also said in a separate statement that from Feb. 17 it would introduce one- to six-day deposit auctions with a maximum rate that equals the key rate to help absorb excess liquidity that exceeds banks' demand.
    "These instruments are aimed at preventing the excessive volatility of money market rates in case of considerable liquidity fluctuations," the central bank said.

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