Russia cuts key rate for first time in over 10 months

Russia`s central bank cut its key interest rate by half a percentage point Friday, the first reduction in nearly a year after the ruble recovered thanks to a bounce in oil and fading inflation fears.

AFP| Updated: Jun 10, 2016, 18:36 PM IST
Russia cuts key rate for first time in over 10 months

Moscow: Russia`s central bank cut its key interest rate by half a percentage point Friday, the first reduction in nearly a year after the ruble recovered thanks to a bounce in oil and fading inflation fears.

"The Bank of Russia Board of Directors decided to reduce the key rate from 11.00 to 10.50 percent," the bank said in a statement. 

"The Board of Directors notes the positive trends of more stable inflation, decreased inflation expectations and inflation risks against the backdrop of imminent growth recovery in the economy."

Russia is desperate to breathe life into its energy-driven economy, which is mired in a recession caused mainly by the drop in oil prices and Western sanctions imposed over Moscow`s meddling in Ukraine. 

The ruble has risen some 25 percent since January as the price of oil has nearly doubled after hitting its lowest point in over a decade.

Inflation has now also steadied at around 7.3 percent, according to the central bank, its lowest level since 2014. 

The bank said that it was now marking down its inflation forecast for the end of 2016 to between five and six percent and said inflation would hit its long-term target of four percent by the end of 2017.

The rise in the national currency and stabilisation of inflation had ramped up pressure on the bank to cut its rate for the first time since late July 2015.

A slump in oil prices from their 2014 peaks and worries over inflation spelt the end of a series of rate reductions at the time as Moscow cut back following a monster rate rise in December 2014 aimed at stemming a dramatic ruble drop. 

In its statement announcing Friday`s reduction, the bank pledged it would also look to further cut back the key lending rate in the future. 

"The Bank of Russia will consider the possibility of a further rate cut based on estimates for inflation risks and alignment of inflation decline with the forecast trajectory," the statement said.

The ruble weakened slightly Friday against the dollar to around 64.5 and to around 72.9 against the euro.

Central Bank chief Elvira Nabiullina said at a press conference that it had improved its forecast for the Russian economy overall this year to predict a contraction of between just 0.3 and 0.7 percent. 

The International Monetary Fund predicted last month that Russia`s economy will contract by some 1.5 percent this year before growing by 1 percent in 2017. 

Russia is gearing up for parliamentary elections in September that will test how resilient support for the authorities is in the face of growing economic woes. 

Economists were split in the run-up to the decision on whether the central bank was ready to cut rates and remained divided over the move. 

Capital Economics said that decision had been a "close one" but now that the central bank had taken the plunge and restarted its easing cycle "interest rates will now fall further than the consensus is currently expecting".

Alfa Bank, however, said they saw the reduction as a "surprise" as there still remained some inflationary pressures and predicted that the bank would hold off from further cuts at its next meeting in July.

"First, we believe that the acceleration of budget expenditure growth for the rest of this year will be inflationary," the bank said in a note. "Second, the recent quickening of salaries growth also signals inflationary risks."

"All in all, it appears to us that the (central bank) decision was dictated by market trends rather than by improvement in internal fundamentals."