Analysis: Russian-style quantitative easing may sow trouble

Thu Nov 22, 2012 7:54am EST
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By Jason Bush

MOSCOW (Reuters) - It has been dubbed quantitative easing, Russian-style. A surge in central bank lending to Russian banks is sustaining rapid loan growth, but also risks fueling inflation and a potential credit bubble.

On the face of it, Russia's central bank has been acting tough. To clamp down on inflation it has recently hiked interest rates - in stark contrast with the ultra-loose monetary policies seen in western economies.

But while Russia has tightened the monetary screws with one hand, it has been opening the flood gates with the other.

"They are sending conflicting signals," said Natalia Orlova, chief economist at Alfa Bank. "They are raising interest rates ... and at the same time they continue to fund loan growth."

Total credit extended by the central bank has mushroomed to 2.5 trillion roubles ($80 billion) as of November 1 from negligible levels in mid-2011, and is approaching levels seen at the height of the 2008-9 financial shock.

And the central bank's role in financing banks looks set to keep growing as Russia's authorities endeavor to halt a possible slide in bank lending that would deepen an economic slowdown and undermine support for President Vladimir Putin.

At least in theory, more central bank funding for banks is a way to prop up the economy by encouraging banks to lend, supporting spending by companies and consumers.

FUNDING SQUEEZE   Continued...