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ATON - Daily Dashboard, Economics - Sep 14, 2012.


Central Bank of Russia Maintains Inflation Targeting Principle

The Central Bank of Russia (CBR) increased key rates by 25 bpts on Thursday, taking the refinancing rate to 8.25%, the minimum auction-based repo rate to 5.5% from 14 Sep, and the minimum deposit rate to 4.25%.

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The CBR tightened monetary policy because of the increasing pace of price increases (YoY inflation reached 6.3% on 10 Sep, exceeding the CBR's FY12 target of 5-6%) and rising inflationary expectations, against a backdrop of accelerating food price inflation due to reduced crop forecasts in Russia and key global producers. Meanwhile, the CBR does not see serious risk of an economic slowdown yet: according to the regulator, the state of the labor market (unemployment is at an all-time low of 5.4%) and high consumer loan growth indicate stable consumer demand.

At the same time, the Ministry of Economic Development forecasts that GDP growth will slow to 3.5% b y the end of the year (from 4.4% YoY in 1Q12). We think that tightening monetary policy will lead to higher company borrowing costs in the real sector and hinder economic growth. It appears that the regulator has decided to stick to its inflation-targeting principles. Nevertheless, we believe that its actions will be largely ineffective. First, rising food prices, which can be seen globally (as in 2008), are one of the basic causes of accelerating prices. Second, base effects (high in 1H12 and low in 2H12) have become stronger thanks to the postponement of regulated tariff indexation to June, which is why higher YoY inflation indicators are inevitable.

Given that the CBR's press release did not indicate that it is satisfied with money market rates, it is possible that this could be the beginning of a cycle of raising basic monetary policy parameters. The next meeting of the CBR's board of directors will take place in early October.


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Publication:Russian Banks and Brokers Reports
Geographic Code:4EXRU
Date:Sep 14, 2012
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