Central Bank Says Interest Rate Cuts on Hold for Now

The Central Bank halted its 13-month run of interest rate cuts on Wednesday and said policy may stay on hold for months given a recovery that looks to be on surer ground while price pressures remain benign.

All but one of the analysts polled by Reuters this month had forecast an end to the cycle of cuts — stretching back to April of last year — which have taken benchmark rates to a record low of 7.75 percent and helped the economy out of recession.

Russia is now expected to move toward tightening — but not until inflation picks up toward the end of 2010 or early 2011.

"The current parameters of interest rate policy … ensure an acceptable balance between affordable loans and inflation risks," the Central Bank said in a statement. "The Central Bank thinks it likely that the current level of interest rates will be retained in coming months."

The regulator indicated on May 31 that last month's easing could be the last in the cycle — a message that officials reiterated on Tuesday.

Although the slowdown in inflation seen at the start of the year is now running out of steam, "in coming months inflation risks remain at an acceptable level," the regulator said.

"That could be interpreted as several months, but not several quarters. I expect that inflation will accelerate in December-January, and the Central Bank will start to hike rates," said Alexander Morozov, chief Russia economist at HSBC.

Most analysts see rates stable for the rest of the year before gradual tightening starts in 2011.

Consumer prices rose 6 percent year on year in May, matching April's post-Soviet Union low. That is in line with the Central Bank's expectations for 2010 as a whole and leaves the benchmark refinancing rate comfortably in positive territory even when adjusted for inflation.

The Central Bank did not directly mention the ruble, in contrast to earlier statements this year, when it pointed to ruble appreciation as one of the reasons for continued rate cuts. This time, it said the level of rates is "neutral from the point of view of cross-border capital flows."

"If there is no pressure on the ruble from capital inflows, towards appreciation, then it does not give a cause for cutting rates," said Morozov at HSBC.

For its part, the ruble showed little reaction to the decision, holding broadly stable at 34.38 against the euro-dollar basket and supported by oil prices.

May brought signs of improved economic recovery with faster growth in retail sales, capital investment and industrial output — all noted by the Central Bank in its statement.

The regulator, which has sought to encourage more affordable lending to businesses and consumers as Russia strives to become less dependent on oil, also welcomed continued signs of credit growth.

Banks have complained that rates are now too low and they may be left with more bad debts after borrowers, tempted by cheap credit, take on more than they can afford.

But the Central Bank said loans could become more affordable yet thanks to current monetary policy and "a revaluation of credit risk as the economic situation improved and market expectations stabilize."

The next board meeting on policy is due in July, the regulator said. As usual, it did not give a date.

June was the first time the bank had issued a statement following an unchanged policy decision — part of its move toward greater openness under the auspices of a long term plan to shift to inflation targeting as the focus of policy from exchange rate control. Previously it only commented when rates were changed.