Russia's Central Bank seen leaving rates on hold

MOSCOW: Russia's central bank is widely expected to take a breather with tightening of monetary policy on Monday after an at least temporary respite in price rises and data that suggests the economic recovery is still fragile.

Russia's consumer prices have risen 0.1 percent for three consecutive weeks, taking inflation since the start of the year to 4.6 percent. That compares with the central bank's full-year target of 6-7 percent.

Central Bank Governor Sergei Ignatyev said on Thursday the regulator was not in a hurry to raise rates, citing concerns about a possible shortage of domestic liquidity.

While inflation gains in urgency as one of the top concerns among Russians ahead of parliamentary and presidential elections late this year and in 2012, the central bank is counting on a seasonal food price decrease in summer.

The central bank is also worried that higher rates will attract speculative capital inflows through carry trade operations, where low-yielding currencies such as the dollar are used to fund the purchase of higher-yielding Russian assets.

"Despite the fact that this time the central bank may leave key rates unchanged, citing uncertainty in the global economy, monetary conditions will tighten as a result of a worsening in the situation around liquidity," said Maxim Oreshkin, chief economist at Credit Agricole in Moscow.

The money market's benchmark RUONIA rate, currently at 3.68 percent, may exceed the central bank's deposit rate by 50 basis points by month end, said Oreshkin.

At its April meeting the central bank raised all key rates, surprising markets with a broad tightening move.

Following are main scenarios of the central bank meeting:

The median forecast in the poll of 17 economists pointed to the central bank leaving the deposit rate on hold. This rate tends to have the most significant effect on rouble liquidity.

If the deposit rate is left unchanged, it could disappoint yield-hungry investors, putting some downside pressure on the rouble.

"If the central bank hikes rates, the rouble will firm a little. If rates are put on hold, the rouble may slightly ease," said Pyotr Milovanov, a dealer at Metallinvest bank.

Only two economists of 17 polled by Reuters predict a 25 basis point hike.

The refinancing rate -- officially seen as the benchmark rate -- has had less influence on domestic liquidity since interbank money market rates fell below its level in 2010.

The rouble is unlikely to react immediately if the refinancing rate is left at 8.25 percent, as that is already priced in by the market. An unexpected rise in the rate could reinforce rouble demand.

The median forecast in the Reuters poll showed Russia leaving reserve requirements at 5.0 percent for banks' liabilities to corporate non-residents on Friday, and at 4.0 percent for other liabilities.

Dealers say the rouble is unlikely to be moved by the decision on reserve requirements.

Copyright Reuters, 2011