MOSCOW: Bank of Russia cut interest rates for the third time 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.
The central bank cut its key rate by 1.5 percentage points to 12.5% and said more rate cuts are likely to stimulate the economy as inflation slows.
The rate cut was widely expected as Russian authorities have been saying that the worst of the economic turmoil caused by Western sanctions and lower prices is over. The central bank said it decided to cut rates as inflation has showed signs of slowdown while risks of “substantial economic cooling” remain in place.
Unlike previous statements, the central bank didn’t provide any new forecasts for gross domestic product. 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.
However, the central bank did say it expects the economy to start growing in quarterly terms in 2016.
President Vladimir Putin said this week that the economy won’t collapse but hinted that it needs a weaker ruble.
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 converts them into high-yielding ruble assets.
Russia needs a weaker ruble to support the competitiveness of its industry and the ruble windfall the currency’s drop generated for the country’s budget, which is heavy dependent on taxes pegged to the dollar and euro.
The market consensus forecast envisaged a rate cut of one percentage point, although some analysts said they thought the central bank would opt for cutting the key rate to 12%.
The rate decision was “a compromise” as the central bank balanced the need to “show a commitment to reach the 4% inflation target by 2017 against political pressure to boost growth,” said Per Hammarlund, an analyst at SEB.
“The bank is walking a tightrope trying to support economic activity by cutting interest rates on the one hand and managing high inflation expectations on the other hand,” he said.
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