Russia holds rates, plays down liquidity risks

The Russian central bank left all key rates unchanged on Friday, taking a pause from gradual narrowing of the spread between lending and deposit rates, and indicating that it sees the current shortage of liquidity as a near-term supply shock. The decision, widely expected by economists and market alike, came at a time when interbank money rates rose to levels of early 2010 and the amount of cash sought from the central bank via repurchasing auctions reached its biggest since 2009.
The central bank said in a statement that it sees a growing need for refinancing instruments and that it would ease borrowing requirements, but it stopped short of restarting the collateral-free loans used widely during the 2008-2009 crisis. "The Bank of Russia is not planning to consider relaunching the practice of providing collateral-free loans in the foreseeable future," Central Bank Deputy Chairman Sergei Shvetsov told Reuters after the decision.
Banking liquidity, on both correspondent and deposit accounts with the central bank, was at 750 billion roubles, half the level seen before the August-September global turmoil that tightened credit and spurred further capital flight form Russia. Russia still has a complex system of rates whose importance changes along with market conditions. The one-day repo rate, now an effective benchmark for money market rates, stands at 5.25 percent.
But the central bank reiterated that the current level of rates provides an adequate balance between easing inflation and a slowdown in economic growth. "The decision was based on an assessment of inflationary risks and risks to the sustainability of economic growth, including lingering uncertainty about external economic developments," the central bank said in a statement.
Consumer prices have risen 4.9 percent so far this year and are set to come in at a post-Soviet record low for the whole of 2011. The economy expanded a robust 5.1 percent in gross domestic product terms in the third quarter, but both the government and economists alike expect it to slow down to around 3.8-4.0 percent in the last three months of the year. The central bank kept its benchmark refinancing rate, which serves as a guide for retail lending, at 8.25 percent.