Thursday, April 29, 2010

Russian Central Bank Drops Rate to Promote Lending

The Russian central bank, Bank Rossii, dropped the refi (refinancing rate) 25bps to 8% in order to encourage loan growth and further stimulate the economy; trading off potential increases in inflation with sustaining the recovery. The move marks the 13th reduction in the rate during the recession; down a total 500bps since the high of 13% in early 2009; but could be the last reduction. The following quotation is from the trusty (or somewhat rusty) Google translate of the announcement (which is only released in Russian):
"Dynamics of the main Russian macroeconomic indicators show a gradual tendency towards the restoration of economic growth. In March, [there was] continued growth in real disposable incomes, [and] increased turnover of retail trade. However, the overall process of economic recovery remains fragile, [and there is] still [the] need to support the dynamics of domestic demand. [As] Observed in March-April, the growth of bank credit [in the] economy is negligible, despite some reduction in rates on loans to MSEs.

In these circumstances, the decision of Bank of Russia is directed primarily to further promote awareness [and use] of credit activity of the banking sector and, ultimately, improving the availability of lending to the real economy."

Of the so called BRIC economies Russia is the only economy still in recession (i.e. still not in positive growth), and logically it is the only one still expanding stimulus measures; with Brazil announcing a 75bp increase yesterday, and along with China and India; increasing the required reserve ratios for the banks. Russia took a significant hit during the crisis as the crash in oil prices hit its energy commodity dependent economy, which of course flowed through to break other bits of the economy as well. Thus a big challenge for Russia will not just be getting its economy back to growth, but also diversifying its economy for a more structural recovery; rather than returning to a dependency on energy commodities - and risking the old "Dutch Disease".

So it will be interesting to see how the growth and inflation picture plays out for Russia this year and beyond, as the strategy of sacrificing possible increases in inflation for higher growth plays through. It may well be that the Russian economy bounces back strongly into growth around 7% especially if oil prices continue to recover or at least remain stable around $80-$90 a barrel. However Russia remains heavily exposed to commodity price volatility, inflation risks, and any further global spillovers. But overall the prospects for Russia are good, you just have to take the volatility with the growth potential, and remember Russian stocks have roughly doubled year on year; so where that leads things next is a point to ponder.

Econ Grapher Analytics
Bank Rossii
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