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Russia May Lower Rates This Month on Lending Decline (Update1)
March 4 (Bloomberg) -- Russia’s central bank may lower the benchmark interest-rate this month after bank lending shrank in January and a “fragile” manufacturing recovery signaled businesses may continue eradicating jobs, a survey showed.
Bank Rossii will cut the refinancing rate a quarter-point to a record low 8.25 percent, according to the median estimate of 10 economists surveyed by Bloomberg. The bank has indicated it may reverse its easing cycle in the second half and it will probably bring the rate to 8 percent by year-end, the survey showed. The bank doesn’t publish a timetable for rate meetings.
“The economy must get a boost to move forward and a deeper rate cut would provide just such a boost,” Tatiana Orlova, an economist at ING Bank NV in Moscow said by telephone.
Russia’s emergence from the credit crisis is “slow and gradual” as high unemployment and slack demand for credit curb growth, Andrei Kostin, head of VTB Group, Russia’s second- largest bank, said on March 2. While Bank Rossii has cut rates 11 times since April, corporate loan books slid for a second month in January and lending to consumers posted a 12th consecutive monthly drop.
Lending is constrained by “a lack of stable growth in the real economy and, consequently, weak demand for borrowing, as well as relatively high credit risks,” the central bank said in a report on March 1.
‘Weak Links’
The economy expanded a seasonally adjusted 0.3 percent in January from the previous month, Deputy Economy Minister Andrei Klepach said on Feb. 25. Even so, unemployment and frail investment demand remain the “weak links,” he said.
Manufacturing posted only a “marginal expansion” last month as industry shed jobs at the fastest rate since August, signaling the recovery is “fragile,” according to VTB Capital’s Purchasing Managers’ Index. Service industries also cut jobs and expanded in February at the weakest pace since July, according to a separate PMI report from VTB.
Russia has lagged behind other central banks in easing monetary policy and will trail them as regulators reverse rate cuts, Bank Rossii said in January.
Australia, Norway, Israel and Vietnam have raised rates since the peak of the global crisis. China and India have increased reserve requirements for banks to avoid stoking unsustainable lending growth, while the Federal Reserve raised the rate charged to banks for direct loans, signaling an end to emergency measures to supply liquidity to financial markets.
Russian inflation has ebbed, leaving room for rate cuts. Price growth probably slowed to an annual 7.2 percent in February from 8 percent in January, “calling for further monetary easing by the central bank,” Vladimir Osakovsky, an economist at UniCredit SpA in Moscow, said in an e-mailed note today.
‘Bullets in Arsenal’
Slow inflation provides scope for cutting the benchmark rate by half a point to 8 percent, though the regulator may “save bullets in its arsenal” to relieve pressure on the ruble and cut by a quarter-point this month, ING’s Orlova said.
The ruble advanced to a six-week high against the dollar on March 3 after the price of oil, Russia’s chief export, rose above $75 a barrel. A 96 percent increase in Urals crude since February last year has boosted the currency’s appeal and the higher relative interest rate makes it a favorite carry trade.
The ruble was little changed at 40.7192 per euro at the start of trading in Moscow today and was at 29.8160 per dollar.
The banking industry “will not see any lending growth before the end of the first quarter, when demand for loans picks up,” VTB Capital analysts said in an e-mailed note on March 2.
Lenders’ investments in corporate debt instruments rose 13.2 percent in January from the previous month, indicating growth in indirect lending to companies, according to VTB.
Credit Activity
Lower interest rates on loans and improving credit worthiness may boost activity by banks in the first half, Leonid Slipchenko and Natalia Mayorova, Moscow-based analysts at UralSib Financial Corp., said in an e-mailed note. Loans are set to increase 20 percent this year, UralSib forecasts.
The economy may expand 4.5 percent, exceeding government forecast of 3.1 percent, Alexei Ulyukayev, a first deputy chairman of Bank Rossii, said in an interview in Izvestia on March 3. His comments were confirmed by a central bank official.
The central bank’s future changes to the refinancing rate “will be determined by the inflationary trends, industrial output and credit activity dynamics, the state of financial markets,” the regulator said in a report.