Russia signals rate cut amid 4.0% growth

Russia on Friday reported strong annualised growth of 4.0 percent while also signalling an imminent interest rate hike aimed at keeping one of Europe’s strongest economies from overheating.

The state statistics committee’s preliminary second quarter reading was in line with analyst expectations following a surprise 4.9 percent jump in gross domestic product between January and March.

Russia’s economy expanded by a steady 4.3 percent last year while recording a post-Soviet low annual inflation rate of 6.1 percent.

The energy export-driven economy achieved this performance in the face of global market turmoil thanks to strong consumer demand and a relatively healthy financial sector that has limited borrowings from troubled European banks.

The International Monetary Fund now forecasts 4.0 percent growth for Russia for the year — an impressive figure considering France is expected to tip into recession and even European powerhouse Germany may stall.

But policy makers now worry that rising global food prices and a steep jump in utility tariffs that had been delayed until after President Vladimir Putin’s May return to the Kremlin will keep inflation expectations high.

Russia reported a 5.3 percent annual inflation rate earlier this week that exceeds last year’s pace and threatens to undermine Putin’s election vow to keep the era of runaway post-Soviet prices a distant memory.

Annual gains in Russian consumer prices had dipped below 4.0 percent for the first time before the electricity rates spiked in July.

The central bank on Friday weighed what it called “the uncertain foreign economic situation” against the inflation risks and decided to leave the main refinancing rate unchanged at eight percent for the eight consecutive time.

Economists however saw a hike coming within a matter of months after the bank removed a key sentence in its statement referring to current levels being appropriate “for the near future”.

“We see the central bank implementing a new round of monetary policy tightening in September-October,” Moscow’s VTB Capital investment bank told its clients.

“We think that the central bank needs to take bold steps in order to preserve credibility and anchor inflation expectations.”

The comments echo a similar warning from the IMF following its directors’ annual fact-finding mission to Moscow.

Fund directors “generally recommended a gradual further tightening of monetary policy to contain underlying pressures and anchor (inflation) expectations,” the IMF said in statement at the start of the month.

Yet some economists fear that rate hikes would only hurt Russia by putting unnecessary pressure on borrowing while doing nothing to protect against rising prices on drought-stricken crops such as corn.

Russia also remains exposed to the danger of downbeat economic data from China tamping down global oil prices and creating budget revenue shortfalls that would automatically slow both spending and demand.

Renaissance Capital economist Ivan Tchakarov said the central bank had left itself “a lot of room for maneuver” while others argued that it was not the regulators’ job to shield the economy from sporadic poor harvests.

“We could get accelerating inflation that the central bank cannot contain and growth slowing because of the regulators’ interest rate measures,” said Vladimir Tikhomirov of Otkritie Securities Limited.