Russia: a hawk among central bank doves?

August 7, 2012

This week has the potential to bring an interesting twist to emerging markets monetary policy. Peru, South Korea and Indonesia are likely to leave interest rates unchanged on Thursday but there is a chance of a rate rise in Russia. A rise would stand out at a time when  central banks across the world are easing monetary policy as fast as possible.

First the others. Rate rises in Indonesia and Peru can be ruled out. Peru grew at a solid  5.4 percent pace in the previous quarter and inflation is within target. Indonesian data too shows buoyant growth, with the economy expanding 6.4 percent from a year earlier. And the central bank is likely to be mindful of the rupiah’s weakness this year — it has been one of the worst performing emerging currencies of 2012.

Korea is a tougher call. The Bank of Korea stunned markets with a rate cut last month, its first in three years. Since then, data has shown that the economy is slowing even further after first quarter growth eased to 2008-2009 lows. Exports are falling at the fastest pace in three years. But most analysts expect it to wait it out in August and then cut rates in September. Markets on the other hand are bracing for a rate cut as yields on 3-year Korean bonds have fallen well under the central bank’s main 7-day policy rate.

Russia’s meeting on Friday promises to be the most interesting one. Inflation has risen sharply in the past two months while utility tariff hikes from August were seen adding 1 percent to this year’s headline price growth number.  Year-end inflation could be 6.6 percent, analysts reckon, well above the central bank’s 5-6 percent target range. Deputy Governor Alexei Ulyukayev (who has been making hawkish noises for a while) told reporters last month rates could be “changed” in August.

Analysts at ING suggest the central bank may raise its deposit rate (which would narrow its interest rate corridor) and/or its reserve ratios for banks rather than move its key lending rate, which would have little impact anyway on food price inflation.  “This could be more about signalling than about a real anti-inflation move,” ING analysts write.

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