The rouble dropped sharply over the past two months, slipping below 31.50/US$ in early April, but has benefited from a mild correction in recent days (daily chart, next page). Economy Minister Andrey Belousov has warned that a volatile currency, coupled with high interest rates, was harming investment in the economy. However, inflation accelerated to 7.3% (y-o-y) in February, from 7.1% in January – well above the official 5-6% target – forcing the central bank to hold its refinancing rate at 8.25% on April 2. Some have concluded from the accompanying statement that a rate cut might occur in the near future, should inflation risks subside. In a show of independence, the bank has continually side-stepped pressure to loosen monetary policy. However, the government is debating broadening the bank’s mandate – which currently focuses on inflation – to include economic growth in its decision making. Mr. Belousov has predicted that the Russian expansion will slow to 1.0% (y-o-y) in Q1, from 2.1% in Q4 2012, and 5.1% in the same period of 2011. Retail sales, of course, grew at their weakest pace in three years in February, up by only 2.5% (y-o-y), whilst industrial output shrank 2%. The services PMI continues to point towards expansion, but the index fell to 54.6 in March from 56.1 in February. Over the same period, the manufacturing PMI dropped to 50.8 from 52, representing its second lowest reading in the past year. An over reliance on energy exports makes the economy (and currency) susceptible to weakness in external demand and international financial volatility.
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