Russian Bank Keeps Rates Stable after New Appointment


Russia's central bank on Friday left its main interest rate unchanged at 8.25 percent in a closely-watched decision that followed the appointment of a new governor with close ties to President Vladimir Putin.

The Bank of Russia kept the same rate for the sixth month running despite pressure to act in the face of weakening growth.

The institution had until now fought off such calls by pointing to inflation that has been running above its upper target of six percent, and which reached an annualised 7.3 percent last month.

The bank said in a statement that the cost of living increase "could lead to higher inflation expectations... and is a source of inflationary risk, especially considering plans to increase tariffs" on electricity and gas.

The decision came three days after Putin said he would nominate economic adviser and close ally Elvira Nabiullina to replace the widely-trusted outgoing bank chief Sergei Ignatyev this summer.

Analysts praised Nabiullina as a wise economist but said she could nevertheless be pressured by Putin. The Kremlin has expressed disappointment at the slow growth and hinted that the rates are too high.

Some analysts said the bank decided not to act now in part because it could not be seen as being swayed by the nomination of Putin's new choice.

"While (Friday's decision) was expected by the market, this was related to the understanding that the Central Bank of Russia would not like to add to excitement that surrounded the nomination of Elvira Nabiullina as the new (bank) governor," said Ivan Tchakarov of the Renaissance Capital investment bank.

But the analyst said that inflation was high due to seasonal factors and the bank would be wise to spur growth soon by bringing down rates.

"The combination of continuously weakening economic activity and supply-driven inflation should indisputably provide the right rationale to cut rates," Tchakarov argued.

Russia's growth has stalled at around four percent after a three-year recovery that followed a near-collapse of the financial system during the 2008-2009 global financial crisis.

But a poor 2012 harvest and the gradual introduction of market rates for domestic consumers of utilities such as electricity have put pressure on the cost of living and complicated the central bank's work.

Russia became the only large emerging economy to actually raise interest rates last year as most other nations lowered theirs to avoid recession.

Putin's nomination of Nabiullina left the key role of the Kremlin top economic adviser vacant and analysts scrambling to decipher which way the presidential adminstration was about to lean.

Some suggested that the emphasis might now be on greater social spending and a bigger budget, pointing to media speculation that Nabiullina would be replaced by Tatyana Golikova -- a former health and social development minister.

"As Golikova may favour continuing to increase the budget's social focus, her potential nomination may be positive for short-term growth expectations but would create concerns over long-term budget stability," said Alfa Bank's chief economist Natalia Orlova.

"Thus, after expressing a preference for a tight budget last year, we see a higher risk of a reversal in economic priorities with a reinforcement of social focus in budget spending," Orlova said.

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