Is Bank Rossii joining the train?
Tomorrow Russia’s central bank – Bank Rossii – is due to announce its latest rate decision, with rates unchanged since December 2011 when the refi rate was unexpectedly cut 0.25pp to 8.00%. Although markets expect Bank Rossii to keep rates unchanged tomorrow, we do not exclude a 0.25pp cut this summer. Although the consumer price index began to accelerate in June from its post-Soviet historical low in April and May, global woes have increased liquidity risk in Russia. The three-month MosPrime rate has climbed to 7.27% in July, to its half year highest, the level it was at before Bank Rossii cut last time.
A liquidity shortage was the main factor triggering the 2008 crisis in Russia, when the economy shrank almost 8% – the worst among G20 peers – and the three-month MosPrime rate rocketed to near 30%. As the oil price started to fall in May 2012 and global capital left emerging markets including Russia and CEE, local currencies weakened. The rouble lost more than 11% against the dual currency basket leading Bank Rossii to support the rate within the corridor of 32.15–38.15. Yet, fearing the 2008 story when large FX interventions dried up liquidity and the money supply, Bank Rossii has been very moderate in its FX purchases this year, pointing out that it is targeting the inflation rate and sending the signal it will allow the rouble to weaken to provide enough liquidity. Thus, a rate cut would be another instrument to show that Bank Rossii is aware the monetary easing would help the Russian economy among the global uncertainty.
Although according to the expectations inflation is increasing in H2 12, it still remains within post-Soviet low levels, which makes rate cuts possible this year. High rates keep loans expensive. In particular, Russian businesses have been experiencing high financing costs at 10% p.a. in May, the highest since August 2010. The spread between loan rates for non-financial organisations and deposits remained wide at 3.2%. High rates restrain economic growth as corporations avoid new investments.
The monetary easing has become a trend to struggle against the economic slowdown not only in Western economies but also in emerging markets and CEE. As Brazilian, Chinese, Czech and South Korean central banks have already cut their rates, we expect the Polish central bank to reverse its monetary policy and deliver a rate cut. A downside movement might also come from Hungary despite high inflation.