Basic Political Developments

National Economic Trends

MOSCOW, May 27 (Itar-Tass) The US dollar's mean weighted exchange rate against the Russian rouble in "tomorrow" deals plunged by 11.14 kopecks to 28.1166 roubles per one U.S. dollar in Friday’s unified trading session as at 11.30 Moscow time, the economic news agency PRIME-TASS reports.

Since April 15, 2003 the Bank of Russia has set the dollar's official exchange rate against the rouble for "tomorrow" delivery on the basis of the weighted mean rate shown in the unified trading session (UTS) at 11.30 Moscow time.
Central bank likely to pause with interest rate hikes

http://www.bne.eu/dispatch_text15433

Citi
May 27, 2011

Inflation is a priority for the Central Bank of Russia, Chairman Ignatiev stressed in his speech at a banking conference in St Petersburg on Thursday. His comments reiterated the central bank's gradual switch to using interest rates rather than controlling the ruble exchange rate as its main monetary policy tool (Reuters, 26 May 2011). However, he said that the central bank would tighten cautiously to minimize any negative impact on growth.

We expect the CBR to pause interest rate hikes at its next meeting on 30 May, as inflation is likely to decelerate. Growth performance appears uneven, with some stabilization in April after the disappointing 1Q 11. M2 growth moderated to 23%YoY in May 2011 from some 36% in September 2011. According to Chairman Ignatiev, there is no excess liquidity in the banking sector any more. Weekly inflation remains moderate at about 0.1% (4.6%YTD this year vs 3.8% at the end of May 2010). While May inflation is likely to stay close to 9.5% driven by non-monetary factors, we forecast it will decelerate during the summer.

Meanwhile, capital outflows reached US$7.8bn in April and about US$30bnsince the beginning of the year, according to CBR estimates. Chairman Ignatiev did not rule out the possibility that the outflows could be driven by an unfavourable investment climate, fast-growing imports and risks of downward correction in the oil price. There is a risk that capital outflows in January-April would not reverse in 2H2011. Together with the falling quarterly current account surpluses, this may lead to the ruble weakening towards end-2011. We think the CBR will resume rate hikes closer to the
end of the year if inflationary risks intensify and capital outflows continue.

Russia's Central Bank seen leaving rates on hold

MOSCOW: Russia's central bank is widely expected to take a breather with tightening of monetary policy on Monday after an at least temporary respite in price rises and data that suggests the economic recovery is still fragile.

Russia's consumer prices have risen 0.1 percent for three consecutive weeks, taking inflation since the start of the year to 4.6 percent. That compares with the central bank's full-year target of 6-7 percent.

Central Bank Governor Sergei Ignatyev said on Thursday the regulator was not in a hurry to raise rates, citing concerns about a possible shortage of domestic liquidity.

While inflation gains in urgency as one of the top concerns among Russians ahead of parliamentary and presidential elections late this year and in 2012, the central bank is counting on a seasonal food price decrease in summer.

The central bank is also worried that higher rates will attract speculative capital inflows through carry trade operations, where low-yielding currencies such as the dollar are used to fund the purchase of higher-yielding Russian assets.

"Despite the fact that this time the central bank may leave key rates unchanged, citing uncertainty in the global economy, monetary conditions will tighten as a result of a worsening in the situation around liquidity," said Maxim Oreshkin, chief economist at Credit Agricole in Moscow.

The money market's benchmark RUONIA rate, currently at 3.68 percent, may exceed the central bank's deposit rate by 50 basis points by month end, said Oreshkin.

At its April meeting the central bank raised all key rates, surprising markets with a broad tightening move.

Following are main scenarios of the central bank meeting:

The median forecast in the poll of 17 economists pointed to the central bank leaving the deposit rate on hold. This rate tends to have the most significant effect on rouble liquidity.

If the deposit rate is left unchanged, it could disappoint yield-hungry investors, putting some downside pressure on the rouble.

"If the central bank hikes rates, the rouble will firm a little. If rates are put on hold, the rouble may slightly ease," said Pyotr Milovanov, a dealer at Metallinvest bank.

Only two economists of 17 polled by Reuters predict a 25 basis point hike.

The refinancing rate -- officially seen as the benchmark rate -- has had less influence on domestic liquidity since interbank money market rates fell below its level in 2010.

The rouble is unlikely to react immediately if the refinancing rate is left at 8.25 percent, as that is already priced in by the market. An unexpected rise in the rate could reinforce rouble demand.

The median forecast in the Reuters poll showed Russia leaving reserve requirements at 5.0 percent for banks' liabilities to corporate non-residents on Friday, and at 4.0 percent for other liabilities.

Dealers say the rouble is unlikely to be moved by the decision on reserve requirements.

http://www.bne.eu/dispatch_text15433

RBS
May 26, 2011

Interesting commentary from Sergei Ignatiev, the chairman of the CBR this morning. First, Ignatiev indicated that while inflationary expectations remain elevated the bank is not yet set to change its inflation target of 6-7% for year end. As of April YTD inflation had reached 3%, with Ignatiev suggesting that MOM inflation would come in around 0.5% in May, comparable to the April out-turn. On a YOY basis inflation reached 9.6% in April. Ignatiev indicated that the harvest remained the main threat to inflation targets - albeit surely herein the favourable base from the year earlier level will help drag down the headline rate later in the year.

Second, the governor appeared pretty dovish in terms of the interest rate outlook, and while noting that no decision had been made over the May 30 interest rate meeting, and while rates/RRRs could be hiked or kept on hold, the CBR was in no rush to tighten.

Third, Ignatiev noted the recovery in credit growth, but seemed comfortable with the current 20/22% YOY rate of growth - admittedly from a low base.

Fourth, the governor indicated that the economy was still on track to meet the official 4.2% real GDP growth target for the year.

Fifth, Ignatiev highlighted the positive impact (on inflation) from the stability/strength of the rouble, albeit ruled out a further near term widening in the official FX bands. He indicated some comfort with current FX volatility, and suggested that the currency could move in either direction.

Sixth, on the issue of capital outflows, the governor revealed that capital flight is continuing, with net outflows of USD30bn for the first 4 months of the year, and apparently a quickening in the pace, with April seeing around USD8.7bn in outflows. Ignatiev indicated that the outflow reflected Russia's difficult business climate and concern over the impact of oil price volatility on the balance of payments. While noting that outflows continued in May, he was upbeat that the outflows would reverse to year end - we struggle with this view given the close proximity of parliamentary/presidential elections.

Seventh, Ignatiev indicated the CBR intervened with around USD3.6bn in FX purchases in April, comparable to that seen in recent months. The overall message though is that the BOP is fairly finely balanced, with a large oil-fuelled current account surplus being partly offset by capital flight, and the CBR intervening at the margin to prevent over-appreciation of the rouble.

Our sense on the FX front is that the CBR will want stability/modest rouble strength this side of elections. The CBR will be both targeting inflation and growth - previously it put a greater weight on growth, but with signs that the population is becoming increasingly sensitive now to the impact of inflation on real disposable incomes, and with opinion polls showing a dip in support for the ruling elites, controlling inflation is also centre stage. The CBR will be eager to try and hold inflation around target. It will monitor inflation trends, and if the signs are that inflation will overshoot, and if the growth outlook is appearing sufficiently robust, it will step from FX intervention. It seems to be running a fine balancing act.

Timothy Ash