Russia May Cut Rates This Month After Economy Slumped

By Alex Nicholson and Paul Abelsky

Sept. 2 (Bloomberg) -- Russia’s central bank may cut its key interest rate this month for the sixth time since it started easing policy in April after output contracted at a record pace and as the economy faces a slow recovery, a survey showed.

Bank Rossii may lower the refinancing rate by 0.25 of a percentage point to 10.5 percent this month, according to the median estimate of 12 economists surveyed by Bloomberg. The rate may fall to 10 percent by year-end, the survey showed. The bank, which doesn’t publish a timetable for rate meetings, began cutting on April 24 for the first time since 2007.

The economy of the world’s biggest energy exporter shrank a record 10.9 percent last quarter after a decline in global trade undermined demand for exports of raw materials from steel to oil. Lower rates have failed to revive credit flows and Prime Minister Vladimir Putin is urging bankers receiving state bailout funds to ramp up lending to resuscitate domestic demand.

“The central bank will continue to ease rates from historically tight levels,” said Rory MacFarquhar, a Moscow- based economist at Goldman Sachs Group Inc. “As the ruble remains comfortably within the 26-41 band against the basket, we see” a further 0.75 point in cuts in the next few months.

Russian policy makers are cutting rates as central banks in Europe and the U.S. turn their focus to the timing of possible rate increases to match an economic recovery. The Russian economy will shrink 6.8 percent this year, compared with a 4.8 percent decline in the euro region and a 2.8 percent contraction in the U.S., the Organization for Economic Cooperation and Development said on June 24.

‘Crisis’

“We’re not out of the crisis yet,” Finance Minister Alexei Kudrin said yesterday.

While most of Russia’s economic decline has stemmed from its reliance on commodity exports, reluctance amongst the country’s banks to lend funds has scuppered a domestic recovery. Overdue loans rose to 5.5 percent of total lending in July from 5 percent in June, central bank figures showed yesterday.

“High lending risks, the growth of overdue debt and high interest rates meant the necessary rate of lending to the economy could not be attained, despite active steps by the government and Bank Rossii,” the bank said on Aug. 26.

The pace of rate cuts will be constrained by inflation that’s hovered above 10 percent since October 2007, economists said. Consumer price growth accelerated to 12 percent in July, the Federal Statistics Service said on Aug. 4.

‘More Sticky’

“Inflation was showing signs of being a little bit more sticky on the way down than they would have liked,” said Manik Narain, a strategist at Standard Chartered in London. “We are seeing a more conservative stance, quite a watchful stance.”

Government stimulus measures are also impeding central bank efforts to ease policy. Russia will post its first budget deficit since 1999 this year, and the Finance Ministry forecasts a shortfall of 8.9 percent of gross domestic product.

“State financing is already sufficient -- it mustn’t be increased,” Kudrin said yesterday. Widening the deficit would require a tighter monetary stance, “and we are trying to do the opposite,” he said, warning against additional fiscal easing.

Inflation will accelerate and the ruble will weaken as the government taps its $88.5 billion Reserve fund to plug the deficit, Standard & Poor’s said in an Aug. 31 report.

“Russia’s past struggle with persistently high domestic inflation suggests further constraints on monetary policies in the future on the back of a fresh surge in inflation,” the ratings agency said.

‘In Sync’

With the scope for rate cuts limited, the central bank may seek to penalize banks that don’t release credit. Lenders may face limited access to the bank’s cash and other funding instruments if they fail to lower interest rates on deposits and credit facilities, First Deputy Chairman Alexei Ulyukayev warned in July.

“They are keeping liquidity conditions tight, which is in sync with keeping inflation stable,” Narain said.

The ruble may trade around 38 against its target dollar- euro basket by the end of September and weaken to 39.7 by the end of the year, according to the median estimate in the survey. That compares with 38.0546 at 12:35 p.m. in Moscow today.

The Russian currency lost as much as 0.6 percent and was down 0.5 percent to 31.9752 per dollar by 12:35 p.m. in Moscow, its weakest level since Aug. 19. It was little changed at 45.4755 per euro.

Investors are betting the ruble will depreciate to 32.68 per dollar in three months, according to non-deliverable forwards. NDF agreements gauge expectations of a currency’s movements by fixing an exchange rate at a particular level in the future.

Signs of Working

Central bank policy is showing some signs of working. Bank interest rates on loans to companies in July were the lowest in nine months as the slump in industrial production eased.

The average rate on loans in July was 14.7 percent, compared with 15.4 percent in June, Bank Rossii said on Aug. 26, though that report didn’t include data for OAO Sberbank, the biggest lender.

Industrial production rose for a second month in July, and gross domestic product also expanded for a second month in July, growing a seasonally adjusted 0.5 percent in the month, according to the Economy Ministry.

‘So-Called Bottom’

“The real economy saw a change in trends in June and July,” Ulyukayev said on Aug. 20. “The lowest point of the downturn was probably passed in May. The so-called bottom is behind us.”

Any recovery will fall short of the boom years Russia enjoyed between 2003 and 2007, when output expanded about 7 percent on average a year, some economists said.

“It’s still very much a case of the pace of contraction easing rather than the economy actually recovering,” said Neil Shearing, emerging-Europe economist at Capital Economics in London. “We’ll be lucky to get much more than stagnant growth next year.”

To contact the reporter on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net.