Russia central bank warns of risks to growth but keeps rates on hold

Moscow: Russia’s central bank warned of risks to growth on Friday and said output was below potential but, with inflation above target and the rouble weak, it resisted political pressure to cut interest rates.

Data this month showing that manufacturing and services sector activity shrank in July added to signs that Russia’s economy is losing steam.

That has bolstered the case for the central bank to cut interest rates, a move the Kremlin has been urging to shore up the economy. But with inflation above 6 per cent and the rouble hitting a four-year low this week, the bank kept rates unchanged at a policy meeting on Friday, although analysts expect it to loosen monetary policy soon as inflation comes closer to the bank’s 5-6 per cent target range.

In an accompanying statement, the bank said that output in the economy was “somewhat lower than its potential level”, signifying no pressure on inflation on the demand side.

It reiterated its forecast that inflation would return to its target range by year-end, and also predicted that inflation would continue to fall in 2014. Inflation on August 5 was 6.5 per cent, the bank said, while core inflation in July was 5.6 per cent, down from 5.8 per cent in June.

Weak investment

For the 11th month in a row, the central bank kept the one-day auction repo rate unchanged at 5.5 per cent, while the fixed one-day repo rate stays at 6.5 per cent and the overnight deposit rate at 4.5 per cent.

The refinancing rate, the largely symbolic cost of overnight loans from the central bank, was held at 8.25 per cent.

Russia forecasts its economic growth will slow to 2.4 per cent this year, due in part to weak investment and falling commodities prices, from 3.4 per cent in 2012.

The rouble has been weakened in recent weeks by selling pressure on emerging market currencies on concerns that the US Federal Reserve could soon start to taper its stimulus programme, which had spurred capital inflows into emerging economies.

A majority of analysts polled by Reuters had expected the bank to keep rates on hold at Friday’s meeting.