NEWSLINK: Russia holds rate, warns of rises if inflation accelerates

File Photo of Cash, Coins, Line Graph

[“Russia holds rate, warns of rises if inflation accelerates” – –  February 14, 2014 –] covers Russia’s Central Bank and its decision to maintain its key policy rate at 5.50 per cent.  The Central Bank cautions that it could raise rates if inflation exceeds the bank’s target, but asserts an expectation that inflation will be held in check.

Russia’s central bank maintained its key policy rate at 5.50 percent, but warned that it is ready to raise rates if there [are] signs that inflation will exceed the bank’s target of 5.0 percent by end-2014.

The Bank of Russia said it still expects the downward trend in consumer price inflation to continue and inflation to converge toward its target by the end of this year as output is expected to remain below the economy’s potential due to the slow recovery of external demand and weak investment activity while the impact of a recent rise in food prices also unwinds. A slow growth of overall monetary aggregates should also help contain inflation this year.

The Central Bank also is assessing food prices, the value of the ruble against the dollar and generally.

So far this year, the ruble is down by 6.2 percent against the dollar, trading at 35.07 today, a level that has not been seen since March 2009 in the midst of the global financial crises.

Amid January’s currency selloff, the central bank on Jan. 30 pledged to launch unlimited interventions in the foreign exchange market if the ruble strays outside its target corridor.

Since 1999, the central bank has operated a managed floating exchange regime and plans to let the ruble float freely in 2015. Under the current regime, the central bank intervenes when the ruble approaches the boundaries of a seven ruble corridor against a dual-currency basket of currencies that comprises 55 percent U.S. dollars and 45 percent euros, a proxy that reflects Russia’s trade relations.

Russian economic growth remains sluggish:

Russia’s economic growth remains sluggish with Gross Domestic Product expanding by only 1.2 percent in the third quarter from the same 2012 quarter, steady from the pace in the second quarter, as industrial output continues to stagnate.

And investment activity is weak:

Weak investment activity is caused by overall economic uncertainty and low profits and consumer demand remains the main driver of growth due to growth in retail lending and wages, the bank said.

“Demand for bank loans has not demonstrated any growth amid the slack in economic activity,” the bank said, adding that it does not consider the lack of lending dynamics to be restraining growth.

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