Central Bank Signals More Cuts

The Central Bank warned  Wednesday that a continued tightening of credit flows represents one of the main concerns for the lender of last resort, signaling that policy-makers haven’t finished cutting interest rates.

“Stress tests show that the situation isn’t ideal,” First Deputy Chairman Gennady Melikyan said.

The Central Bank has lowered the key rate seven times since it started easing policy in April even as inflation remains above 10 percent. Policy-makers, who on Sept. 29 cut the refinancing rate to 10 percent, are trying to combat restrictive lending conditions that threaten to slow economic recovery.

“I don’t see any reason why they should not be cutting” rates, said Ivan Tchakarov, an analyst at Nomura Holdings.

Sluggish lending is holding back demand in the domestic economy and easing pressure on inflation, which will slow to less than 14 percent this year for the first time since the country’s 1998 default, the government estimates.

The current level of inflation and interest rates provides a “big opportunity” to cut rates further, Alexei Ulyukayev, another of the bank’s three first deputy chairmen, said Wednesday. Inflation probably won’t exceed 10 percent this year, he added.

Benchmark interest rate cuts to date have yet to lead to an increase in lending, Audit Chamber Chairman Sergei Stepashin told lawmakers.  

The Central Bank has stress tested all its banks, with results showing that some of the country’s 100 biggest lenders won’t fulfill capital adequacy requirements, Melikyan said. Capital shortages may appear within six months, he added. The Central Bank and the government have no plans to publish the test results, he said.

Banks, and other companies, may struggle to sell debt to consolidate their balance sheets next year as investors opt to place their funds in government bonds instead, according to analysts at Bank of America Merrill Lynch. The government has announced that it plans to sell as much as $18 billion in debt in 2010 to plug an estimated 6.8 percent budget deficit of gross domestic product.  

“We don’t see serious threats to the stability of the banking system,” Melikyan said.

Credit flows have remained tight even after a fall in delinquent loans, with bad debt in September declining 2.3 percent, not including Sberbank, Melikyan said. The decline in bad loans may not represent a sustainable trend, he added.

According to Moody’s Investors Service, “problem loans” will rise to 20 percent of total lending by the end of this year and swell to 25 percent in 2010.

See also:

Russian Central Bank Lowers Key Interest Rate

Russia’s Central Bank Warns of Budget Risks as Oil Prices Look Set to Fall

Russia Sees First Capital Inflow in 5 Years