By Lidia Kelly and Katya Golubkova

By Lidia Kelly and Katya Golubkova


MOSCOW (Reuters) - The Russian central bank's largely hawkish monetary policy stance and a lack of good borrowers mean that despite a banking sector liquidity surplus, lending will remain costly and growth will be sacrificed to keep inflation in check.


Even if the central bank cuts its key rate on Friday by 50 basis points to 10 percent, as broadly expected, the easing will not aid the economy, which is in the second year of a recession, hit by sanctions and low oil prices.


Inflows from the finance ministry's budget deficit spending that have allowed banks to wean themselves off central bank money, carry risks of inflation, of careless lending and, as the central bank has said, of asset bubbles.


The central bank is preparing its first bond auctions in years to soak up the liquidity, signaling that a hit to the economy is secondary to getting inflation to the target of 4 percent by 2017.


If achieved, this would be the bank's biggest success after overshooting inflation forecasts for several years. In the past 12 months, it has cut rates only once while inflation has fallen from mid-teens to below 7 percent.

"This suggests that their reaction function is very much asymmetric," Andrew Matheny, a senior economist at Goldman Sachs, told a conference this week.

"They would rather target an undershoot of inflation next year than an overshoot."

The central bank has often warned that cutting rates too fast will not spur growth but will cause a spike in inflation. Gross domestic product is expected to fall 0.5 percent this year before returning to 0.8 percent growth in 2017.


With a budget deficit at around 3.2 percent of GDP and limited ways of financing it, the finance ministry tapped one of its sovereign funds to cover the hole. In August, it spent 390 billion rubles ($5.98 billion) from the Reserve Fund.

Although the central bank does not expect a sustained banking sector liquidity surplus until next year, it is worried about too fast a transition.

It is re-introducing, so far on trial basis, the Operations with the Bank of Russia bonds (OBR), not used since 2010. The bonds promise to be a secure money parking option that will discourage banks from lending.

The bank has also restarted deposit auctions after liquidity surplus peaked temporarily to 1 trillion rubles. This week, banks placed 400 billion rubles on deposits at a lucrative yield of 10.39 percent.

The need to sterilize liquidity will only increase and the central bank governor Elvira Nabiullina said last week the bank was prepared to deal with it.


The lending situation in Russia is complicated by the country's long dependence on hydrocarbons and a small basket of other commodities that have left a limited number of quality borrowers.

This threatens risky lending, such as the unsecured consumer lending boom in 2011 - something the central bank will most certainly try to curtail.

"Quality (credit) growth ... we all know the firms: we can count them on our fingers," Denis Poryvai, a senior analyst at Raiffeisen bank, told a conference. His bank expects a 5-10 percent growth in lending next year.

With no demand from good borrowers who are able to borrow more cheaply on external markets, and those under sanctions remaining cautious, a lending boom is unlikely.

"We need to look at this calmly: this is not an accidental process, this is they key goal - to come to much lower inflation," said Mikhail Matovnikov, a deputy managing director at Russia's largest bank Sberbank.

(Writing by Lidia Kelly; Additional reporting by Alexander Winning and Elena Fabrichnaya; Editing by Katya Golubkova and Toby Chopra)