MOSCOW: Bank of Russia cut interest rates on Monday for the fourth time this year to check Russia’s economic contraction, but the central bank warned that inflationary risks limit the scope for further monetary easing.
The bank cut its key rate by one percentage point to 11.5%, in line with expectations, bringing its total cuts so far this year to 5.5 percentage points.
“The latest studies show that a decline in inflationary expectations has slowed recently,” said Elvira Nabiullina, the central bank’s chairwoman.
However, she added that unlike inflation, which peaked earlier this year at nearly 17%, Russia’s economy hasn’t bottomed out yet.
Russia’s inflation rate slowed to 15.6% in early June, helped by the ruble’s partial recovery, and is expected to decline to a single-digit reading next year and further toward the central bank’s target of 4% over the next few years.
Some analysts had expected the central bank to cut rates by 150 basis points, as it did in April. The fact that it opted for a smaller cut shows its intentions to “be on a safer-side with policy easing”, said Dmitry Polevoy, chief economist at ING Bank in Moscow.
Ms. Nabiullina said a bigger and a more rapid cut to interest rates would make holdings of ruble-denominated assets less attractive, which, in turn, would fuel capital outflows and dent the ruble.
The moderate rate cut was taken as a sign the central bank would like to prevent a further weakening in the ruble, which has been under daily pressure from the bank’s purchases of foreign currencies for its international reserves.
The ruble had firmed to 54.4 against the dollar in Moscow’s evening trade, from 55.15 before the rate decision.
“It makes sense to believe the central bank will moderate the easing pace over the next couple of months, in order not to significantly upset ruble dynamics. We can actually see a more acute easing phase once we are through the summer months,” said Luis Costa, an analyst at Citigroup in London.
The central bank’s report on monetary policy also sent a positive signal for the ruble. The bank said it wants to boost its gold and foreign exchange reserves to previous levels of $500 billion within five to seven years, compared with an earlier plans to replenish coffers in three to five years. This suggests the central bank won’t substantially boost daily interventions on the currency market from current levels of up to $200 million.
Speaking to reporters, Ms. Nabiullina said the ruble’s volatility is a concern for the central bank. But the Russian currency isn’t expected to weaken drastically from its current and fundamentally adjusted levels, she said.
The market had already priced in the rate cut after top central bank officials pledged to lower the cost of borrowing. Still, after four rate cuts so far this year the key rate remains above its level of 10.5% in early December, before an emergency increase to 17% that helped stabilize the plummeting ruble.
The central bank admitted that Western sanctions are likely to remain in place in the next few years. It noted substantial risks to the economy, but said inflationary pressures had subsided somewhat. It said it expects the economy to shrink by 3.2% this year, compared with its previous forecast of a 3.5%-4% contraction.
