Russian Monetary Policy Tightened: Refi Rate and Reserve Requirement Both Raised

February 25, 2011

Bank Rossii today escalated its attack on inflation.  Propelled mostly by higher food costs, the 12-month rate of CPI inflation had risen to 9.6% in January from 8.8% in December, 8.1% in November, 7.5% in October, 7.0% in September, 6.1% in August and 5.5% in July.  The medium-term inflation goal is 7%.

Central Bank officials until now had been reluctant to raise its key refinancing rate, which had been at 7.75% since June 1, 2009, for fear of promoting heavier inflows of foreign capital.  Instead, reserve requirements had been raised a month ago by 100 basis points to 3.5% on non-resident firms and by 50 bps for all other deposits.  Reserve requirements will go up a second time on March 1 to 4.5% for non-resident firms and 3.5% for resident entities and individuals.

In addition, the refi rate rises to 8.0%, effective Monday, February 28th.  This will be its first increase since a 100-bp advance to 13.0% in December 2008.  During 2009, the benchmark Russian interest rate was sliced by 425 basis points in all, and four more 25-bp cuts were implemented over the first five months of last year.

The catalyst for overcoming resistance to a rate hike appears to have been the spike in oil prices, which is likely to drive more capital into Russia anyway and make the task of containing inflation even harder.  Officials concede the possibility but not certainty of further rate hikes.  That sounds like a high probability of such happening again.  GDP is meanwhile likely to expand more than 4% this year.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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