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Inflation pushes borrowing costs up
CBR hikes refinancing rate, leaves room for maneuvering

The Central Bank of Russia (CBR) has increased its benchmark refinancing rate, arguing that inflationary expectations are on the rise. However, if the regulator keeps pumping cash into the economy, a higher refinancing rate could actually lead to an increase in the inflation rate, experts pointed out.

Having left the refinancing rate at 8% since December 23, 2011, CBR took a somewhat unexpected decision yesterday to increase the refinancing rate by 0.25 percentage points alongside other rates on its transactions. The decision was made in view of rising consumer prices and inflationary expectations, which exacerbate the risk of exceeding CBRs mid-term inflation forecast amid a lackluster economic environment, the regulator noted.

According to CBR, Russias consumer price inflation picked up in August and September 2012, reaching 6.3%, as food prices continued to climb, while the government implemented the planned tariff hikes for housing and utilities services. An eventual downturn on the global and domestic food markets due to poor crops remains the key inflationary risk, CRB pointed out.

CBRs move to increase borrowing costs came as a response to accelerating inflation, Olga Belenkaya, and analyst with Moscow-based investment boutique Sovlink, said. In this case, by setting a higher refinancing rate CBR seems to be signaling a shift to a tighter monetary policy, she went on to say, adding that CBR made this decision, considering that the market would tolerate higher borrowing costs, since consumer lending and employment are on the rise.

Yuliya Tsiplyaeva, chief economist with BNP Paribas, argued that a higher refinancing rate would strengthen the ruble rate vs. the U.S. dollar and the dollar/euro basket, while taking this decision in September, and not in October, as had been expected by the market players, provides CBR more room for maneuvering. Should food prices continue to rise, CBR will have enough time and resources to further increase borrowing costs, Tsiplyaeva pointed out. She noted that a higher refinancing rate is expected to gradually cool the banking industry. As lending has been rising throughout the year and loan portfolios expanded, a number of banks, including major players, started to feel a lack of capital, Tsiplyaeva said.

However, some experts consider CBRs move to be headed in the wrong direction. Increasing borrowing costs could have a boomerang effect on the inflation rate, if CBR keeps pouring cash into the economy, Yevgeny Gavrilenko, chief economist with Troika Dialog investment bank, pointed out. According to Finam Managements Chief Economist Alexander Osin, a higher refinancing rate could also weaken the ruble rate and have a negative impact oSn the financial markets.

Research Department of RIA RosBusinessConsulting

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