UPDATE 2-Russia tweaks some rates, signals main ones on hold

Mon Dec 10, 2012 7:03am EST

* Central bank raises fixed deposit rate to 4.5 pct, cuts forex swap rate to 6.5 pct

* Narrowing of interest rate corridor seen as reducing market volatility

* Central bank sees money market rates as acceptable for near future

By Jason Bush

MOSCOW, Dec 10 (Reuters) - Russia's central bank tweaked its policy rates on Monday, in a move designed to reduce market volatility, and signalled that it intends to keep rates on hold in the near future.

It raised its fixed deposit rate by 25 basis points to 4.5 percent, while cutting its foreign exchange swap rate for roubles by 25 basis points to 6.5 percent.

Main lending rates were left unchanged.

The decisions represent a more dovish stance than at the time of the last rate change, in September, when the central bank raised all its rates by 25 basis points to crack down on rising inflation.

"Basically the central bank has signalled that going forward there will be a pause," said Vladimir Kolychev, chief economist at Rosbank. "The rate decision indicates that the current tightening has ended."

Most analysts had predicted no change in rates at Monday's meeting. A recent easing of inflation concerns, coupled with growing evidence of an economic slowdown, have reduced pressure on the central bank to continue interest rates hikes.

However, an increase in the deposit rate has long been seen as likely at some point, as the step is in line with the central bank's long-term strategy of reducing the spread between its deposit and lending rates, which determines the range in which money market rates fluctuate.

"It's a matter of timing: Amid a stabilisation of inflation expectations and a slowdown in economic growth, this step is justified and logical," said Alexei Pogorelov, an economist at Credit Suisse in Moscow.

The rate cut for foreign currency swaps, which follows a similar cut in June, is seen as improving banks' access to rouble liquidity, and also brings the currency swap rate into line with the fixed one-day repo rate, creating a firmer upper ceiling for money market rates.

The fixed one-day repo rate was left unchanged at 6.5 percent, with the auction repo rate unchanged at 5.5 percent, and the overnight refinancing rate held at 8.25 percent, implying no change in the central bank's main lending rates.

There was virtually no reaction in the rouble to the rate decision, with the currency steady at 30.87 against the dollar . Yields on Russia treasury bonds fell slightly because the decision is seen as another step towards a formal inflation targeting regime.

LONG-TERM STRATEGY

Reducing the spread between the central bank's deposit and lending rates is part of its long-term strategy of shifting towards inflation targeting, a policy framework that requires tighter control of interest rates as the central bank allows the rouble's exchange rate to float more freely.

In its accompanying statement, the central bank said that it regarded the higher deposit rate as neutral for the stance of monetary policy, but said that the move would reduce the volatility of money market interest rates and improve the transmission mechanism for interest rate policy.

Analysts said that they saw the move as having little immediate impact on monetary conditions. Banks are of liquidity and have few funds deposited at the central bank.

The cut in the forex swap rate was potentially seen as having a greater impact because such swaps provide a convenient tool for some banks to obtain rouble liquidity.

"As a whole we see the decision of the central bank as an attempt at loosening rather than tightening policy," said Vladimir Osakovskiy, chief Russia economist at Bank of America Merrill Lynch.

However, Credit Suisse's Pogorelov said that the cut in the swap rate was unlikely to have a major short-term impact, as the reduced 6.5 percent interest rate is still higher than money market rates, presently around 6 percent.

The tone of the central bank's statement was also broadly neutral, devoting similar weight to risks of higher inflation and slower economic growth.

It said that inflation had stabilised at 6.5 percent in November, with the stabilisation visible across a wide range of products. But it warned that inflation risks remain as inflation remains above the central bank's 5-6 percent target.

It also said that economic growth has deteriorated, with recent macroeconomic data indicating a cooling in economic activity, but said that output remains close to its potential as in previous months.

The central bank said that it regarded the level of money market rates as appropriate for the near future -- a formulation often interpreted to mean policy rates will remain on hold for the immediate future.

However, it refrained from saying it saw rates as appropriate "for the coming months" -- a wording used in some previous statements -- which suggests that changes in rates may still be on the cards after a month or two of holding them.