Central Bank of Russia leaves rates as is

The Central Bank of Russia has opted to leave the key refinancing rate at 8.25% citing the need to balance external uncertainty with moderating inflationary risks. After raising rates earlier in the year twice, the Central Bank noted that July inflation dropped to 9% annualized from 9.4% in June and added that falling food prices were likely to continue on the back of favourable grain harvest forecasts, saying this is likely to lead to reduced inflationary expectations.But it also noted that growing retail sales were outpacing incomes, with slowing deposit rates adding to evidence of a propensity to spend, which could boost business activity and add to inflationary pressure.It said it was retaining its end of year forecast for 7% inflation. HSBC Bank, Russia, economist Artyom Biryukov believes the Central Bank needs to be a little more wary in interpreting inflation data. “In fact, I’d look at the inflation drivers in a way different from the CBR. I’d be less optimistic about future inflation dynamics and would look more positively at the risks for economic growth. Our company’s respondents for calculating PMI index said they increased their spending on marketing and telecommunication, which indicates their willingness to grow.” But the bank also noted a rise in industrial output, with unemployment down due to seasonal factors, to be balanced against a fall in fixed capital investment which the Bank noted reflected fragility in the economic outlook. Biryukov believes the Central Bank may well have finished its rate tightening cycle, with another one possible depending on the macro outlook by the end of the year. “I think, that basically the Central Bank finished its tightening policy, but still it can lift the refinancing rate another 0.25% by the year end in the wake of a strengthening rouble.”