Moscow: Russia's central bank on Tuesday unveiled a widely-expected interest rate cut, its ninth since April, in a bid to slow down the appreciation of the rouble and support the economy's still fragile recovery from recession.
The benchmark refinancing rate was reduced by 50 basis points effective from Wednesday, to a new historic low of 9.00 percent. Other rates were also reduced by the same amount, taking the minimum rate on one-day repo auctions -- a key central bank liquidity tool -- to 6.25 percent.
"Lending activity of Russian banks is still at a low level, and internal demand remains insufficient to ensure stable growth of manufacturing, which led to the need to cut rates," the central bank said in a statement.
"The decision was taken with the aim of further increasing the accessibility of credit resources...and stimulating end demand."
It added that favourable trends in inflation have facilitated the rate cut. Russian Prime Minister Vladimir Putin at the weekend forecast that full-year inflation will come in at 9.6 percent, down from 13.3 percent in 2008.
Russia is starting to recover from its first recession in a decade, into which it slipped in the second half of 2008 at a time of falling oil and commodity prices, investor flight from emerging markets and the global credit crunch.
But the brightening economic outlook, together with the rally in oil prices to one-year highs and the still comparatively high levels of Russian interest rates, have sparked a rally in the rouble.
Some are worried the strength of the currency could unseat the recovery and jeopardise efforts to boost domestic industry.
Restraining the rouble
The central bank said the reduction in domestic and external rate differentials as a result of the rate cut "will contribute to restraining the appreciation of the rouble".
The rouble traded at 35.25 versus a euro-dollar basket, little changed on the day but off a peak of 35.03 set a week ago.
"It is clear that the central bank is looking ever more intensely at the appreciation of the rouble," said Alexander Morozov, chief economist Russia and CIS at HSBC.
"If the rate cuts do not lead to a significant reduction in short-term capital inflows into Russian assets, we can expect additional measures to be taken... which they have already hinted at."
The central bank has said that possible "soft" measures to limit inflow of speculative capital are being discussed, and could include changes in reserve requirements, caps on banks' open foreign currency positions and less favourable tax rules on interest on external borrowing.
However officials remain against the re-introduction of capital controls which were scrapped in 2006.
The interest rate cut was widely expected after the central bank's first deputy chairman Alexei Ulyukayev said earlier this month there was scope for more rate cuts before the end of the year, adding that the issue will be debated at the regulator's Nov. 24 board meeting.
Morozov said he did not rule out one more 25 basis point rate cut this year, while Ulyukayev has said monetary easing could well continue in the first half of 2010.
Bureau Report
First Published: Tuesday, November 24, 2009, 20:03