Russian stocks have been staging a recovery of late alongside other global equity markets. But on Friday, the Russian rouble-denominated Micex index fell 1.1 per cent, sending the index towards its first weekly decline in two months. As Bloomberg points out, the benchmark is down 1.6 percent this week, which is the first decrease since February. The decline snaps the longest winning streak since eight weeks of gains ended in May 2006.
The dollar-denominated RTS index, meanwhile, fared better on Friday retreating only 0.2 per cent following a 4.5 per cent surge on Thursday.
Certainly contributing to the change in sentiment will have been Thursday’s downwardly revision of first quarter GDP from -7 per cent to -9.5 per cent by the Russian Ministry of Economic Development. Adding further pressure, deputy economy minister Andrei Klepach also predicted that second quarter gdp could fall further still.
In quite a staggering reversal the ministry now officially expects second quarter GDP to come in a range of -8.7 to -10 per cent, and that the IMF’s -6 per cent for the whole of 2009 forecast is “quite realistic”. The ministry had previously been forecasting a contraction of -2.2 per cent for the year.
Meanwhile over at the Russian central bank, Thursday saw the announcement of the country’s first rate cut in nearly two years, largely seen coming in response to PM Vladimir Putin’s demand for cheaper domestic borrowing and signs that inflation had stopped increasing. The move at 50 basis points was less than expected, and brings the lending rate to 12.5 per cent. Curiously, however, the announcement was also accompanied by a decision to increase the reserve requirement by 1 per cent as of May.
As Alfa Bank’s Friday research states on the matter (our emphasis):
The CBR’s decision to cut the refinancing rate was expected, and we are even surprised that the cut was not more substantial. However, the decision to increase the reserve requirement is surprising. We expected the CBR to cut the interest rate by 1 ppt following signs that inflation had stopped increasing and that the effect of devaluation on price growth is over. We also believe that the dismal economic statistics for 1Q09 compelled the CBR to react. Thus, we believe that the modest rate cut reflects the government’s expectation that the banking sector will not be able to resume lending quickly enough. The decision to increase the reserve requirement was very surprising: the fund of obligatory reserves now totals R33 bln, and increasing the reserve rate to 1% will sterilize around R30-40 bln from the banking system. Also, as long as the CBR continues to provide banks with uncollateralized loans, which now total R1.2 trln, increasing the reserve requirement is not an important change in monetary policy.
Accordingly, most analysts believe the rate cut will hardly touch upon the 300 basis points worth of hikes that took place over 2008. As Chris Weafer, an analyst at UralsIB tells the Moscow Times:
“For now, though, such a small rate cut will make “no material difference,” said Chris Weafer, chief strategist at UralSib. “People will take the half-point rate cut as a step in the right direction, but we have such a long way to go,” Weafer said.