Russian central bank cuts interest rates as rouble rallies

30 Apr 2015 | Author: | No comments yet »

Bank of Russia Cuts Interest Rate to 12.5%.

MOSCOW: Russia’s central bank on Thursday cut its key interest rate by 1.5 percentage points to 12.5%, in a bid to lift the economy out of recession. MOSCOW—The Bank of Russia cut interest rates Thursday for the third time so far this year and said it was ready to ease monetary policy further in the latest sign that the Russian economy is steadying just five months after a currency crisis triggered by western sanctions and plunging oil prices. Thursday’s rate cut is the third this year following an emergency hike by a massive 6.5 percentage points in December to a prohibitive 17% as the bank sought then to stop a sharp depreciation of the Russian currency.

The central bank said current inflation stands at 16.5% but attributed it to “short-term factors” which include last year’s ruble crash, when the currency traded at as high as 80 to the dollar. Twenty-five of 40 economists in a Bloomberg survey predicted a 100 basis-point decrease, with 10 seeing a reduction of 150 basis points and five forecasting a 200 basis- point cut. Chief emerging markets economist for Capital Economics Neil Shearing called the figures “a little optimistic” adding that the ruble’s recovery “has been built on rather shaky foundations” of stabilising crude prices. “This is a clear signal for banks to lower their rates,” said Dmitry Lepetikov, an expert with VTB24 bank, citing the need by the real economy to be able to borrow on more affordable terms.

Policy makers led by central bank Governor Elvira Nabiullina are accelerating rate cuts to unwind an unprecedented increase to 17 percent in December. Russia’s economy has been hit by a series of shocks, including economic sanctions imposed by Western countries over Ukraine, to which Moscow has responded with an agricultural embargo that sent food prices soaring. It said exports would likely be the only positive factor for the country’s economy this year with consumer demand expected to be low and investment activity set to contract. The world’s largest energy exporter has been hammered by last year’s slump in oil prices and sanctions over President Vladimir Putin’s policies in the conflict of neighboring Ukraine. “The Russian central bank looks to be consistent in its monetary policy after the U-turn in January 2015 when it took into account economic prospects,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail.

Speaking earlier this week, President Vladimir Putin said “it’s already clear that there isn’t any collapse” in the economy, calling it “certain phenomena, certain difficulties” rather than a crisis. The ruble’s biggest monthly rally since 1993 is paving the way for faster easing after the regulator followed a surprise two-point reduction in January by lowering the benchmark by a percentage point in March. The ruble, which is up some 55% versus the dollar from the record lows hit in December, firmed to 51.5 a dollar from levels of 51.75 before the rate cut. In the longer run, the rate move is set to slow the ruble’s rebound as lower rates reduce the currency’s appeal for carry trade—transactions where a market player borrows low-yielding dollars or euros and convert them into high-yielding ruble assets. The rouble’s strength is contributing to a slowdown in inflation, and “with other things being equal and no new significant negative factors,” that will allow for a reduction in the key rate, Nabiullina said April 16 in Washington.

The rouble’s collapse last year and Russia’s ban on food imports in retaliation for sanctions over the conflict in Ukraine helped to more than double inflation from the start of last year. The ministry previously saw a 3 per cent contraction in 2015. “Credit supply is slowing, and so is the economy,” Wolf- Fabian Hungerland, an economist at Berenberg Bank in Hamburg, said by email before the decision. “The central bank finds itself in an environment where a cut of 100 or 200 basis points doesn’t make a difference to investors anymore, but it still does for the economy and the financial system.” While helping curtail inflation, a strong ruble “could also undermine prospects for exports — the only source of growth for the economy,” Matys said.

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