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. Last Updated: 07/27/2016

Bank Cuts Rate to Ease Inflation




The Central Bank on Monday slashed its refinancing rate from 33 percent to 28 percent as the government expressed growing concern that an excess supply of rubles was leading to a spurt in inflation.


But economists said the rate adjustment, the fourth cut this year and the lowest level since Nov. 11, 1997, would not do much to harness inflation since the rate mainly serves as an indicative yield cap for the government's ruble debt.


"The refinancing rate is not a profit-making mechanism in Russia, and cutting the rate does not cut monetary supply at all," said Alexei Zabotkin, chief economist at United Financial Group.


"[The] 28 [percent] is where the yields are already at, and it is basically a reflection of the yields adjustment that has already taken place," he said.


Ruble debt, which trades as GKO and OFZ bonds, is currently bearing average yields as low as 14.84 percent on paper maturing Sept. 27, 2000 to highs of 30.15 percent on paper maturing Sept. 10, 2002.


The rate cut Monday should please investors by helping insure that yields on long-term debt remain around 30 percent, fixed income traders said. Yields could fall to the 28 percent level within weeks, they said.


"Last time when the refinancing rate was reduced from 38 [percent] to 33 [percent], it took two months for the yields to fall," said Sergei Prudnik, economic analyst at Troika Dialog investment bank. "Rates may break through 28 [percent] even faster this time. Why? Because it looks like more people are willing to believe there won't be any significant devaluation [of the ruble] any time soon."


Yields had flirted around the 120 percent mark last year, but they steadily fell as the Central Bank nudged down its refinancing rate. Shortly after the most recent cut f from 38 percent to 33 percent on March 21 f Central Bank head Viktor Gerashchenko said the refinancing rate could fall to 18 percent by the end of the year if annual consumer price inflation did not exceed the 2000 budget's forecast of 18 percent.


But the government's hopes of attaining at least an 18-percent inflation rate appear to have been dealt a blow after inflation leaped from 1.8 percent in May to 2.6 percent in June, economists said. While the government's goal is not out of reach, with inflation growing 9.7 percent for the first half of the year inflation could soar to 35 percent if the June rate is repeated in the upcoming months, they said.


Clearly eager to avoid such a repeat, the Finance Ministry said over the weekend that it was cobbling together measures to absorb the billions of excess rubles that it fears will send inflation spinning out of control.


Rubles are pouring off the printing presses as the Central Bank sells rubles for the healthy hard currency earnings of exporters of oil and other commodities. Under bank policy, exporters have to swap 75 percent of their hard currency earnings for rubles.


The country's monetary base shot up by about 30 percent to 400 billion rubles ($14.3 billion) from January to July, according to Troika Dialog.


Deputy Finance Minister Alexei Ulyukayev said the ministry's inflation plan calls for fresh government and Central Bank securities as well as Central Bank deposits and the use of the federal budget surplus to redeem Finance Ministry debts to the Central Bank, according to news reports Monday.


"The economy is near saturation in terms of its ability to handle the monetary mass on offer," Ulyukayev told the Vremya Novostei newspaper.


He said oil tariffs had recently been hiked with the ruble surplus in mind, and similar measures would be taken as needed.


Economists said they were looking forward to seeing how the government attempts to seize control of inflation.


"We will be interested to see which measures take first priority," UFG said in a research note. "While we would welcome the government using the budget surplus as its primary tool to fight inflation, we are not confident that this will be the case."