MOSCOW: Russia's central bank will make its closest call so far this year when it reviews interest rates on Thursday, economists say, with most predicting the conflict between unruly inflation and slower economic growth will keep rates on hold.
Inflation, spurred by hikes in utility tariffs and the jump in global food prices, has come close to the 2012 official target of between 5-6 percent, hitting an annual 5.9 percent rate in August.
But the economy continues to lose steam faster than expected, with gross domestic product (GDP) growing only moderately by Russian standards at 2.6 percent in annual terms in July - its slowest pace in more than two years.
Nine out of 14 economists polled late last month predicted that the key policy rate - the one day repo rate - would stay on hold at 5.25 percent. This rate caps money market rates.
Economists will be also watching the benchmark refinancing rate. This currently has no market role, but a change from the current 8.0 percent would point to future rate directions.
"We still expect the central bank to keep rates on hold on 13 September and start cutting them later in the year, despite inflation exceeding 6 percent," Vladimir Osakovsky, economist at Bank of America Merill Lynch, said in a note.
Broader inflationary pressures remain in check, he said, while economic slowdown should help to contain inflation and keep the Bank of Russia biased towards easing later in the year.
REPUTATION, LOBBIES AND POLITICS
The central bank has been keeping rates on hold since December and prolonging this approach could call into question the bank's commitment to shifting its main monetary policy focus to inflation targeting from controlling the rouble rate.
Such a decision could be seen as a concession to business lobbies and the banks, analysts said.
However, the central bank could argue that the current inflation spike comes from higher food prices, which are beyond its control, rather than from money supply which it could restrain.
Even so, leaving rates unchanged could be seen as poor management of inflation expectations, increasing the risk of a wage-price spiral and another year of unruly inflation in 2013.
"Rates will have to rise to avoid a sizeable inflation overshoot in 2013 and in order to consolidate the reputation gains of the central bank and to anchor inflationary expectations," Goldman Sachs analysts wrote in a note.
Goldman economists depart from the consensus, expecting a 25 basis point hike i n the repo rate o n Thursday. A rate hike would make the rouble more attractive to investors.
The central bank has been praised by investors and economists for gradually allowing greater rouble rate flexibility, aiming to fully switch to inflation targeting in the next couple of years.
The bank, however, is not legally independent and the broader political context matters in Russia more than elsewhere, Goldman Sachs analysts wrote, saying natural resources exporters and the banks are lobbying against monetary tightening.
"Both groups would most likely support lower rates and a weaker rouble," the economists wrote. "However, we think that at this point other considerations matter more."
Inflation has become a major concern for Russia's aging population, a potential worry for the government which has been facing political protests throughout the year.
"We believe that the commitment of President Vladimir Putin to keeping inflation low is significantly stronger than in the past," Goldman Sachs wrote.
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