Russia’s central bank unexpectedly cut its benchmark interest rate by two percentage points, letting the ruble slide as the economy sinks toward recession.
The one-week auction rate was cut to 15 percent from 17 percent, the central bank said in a statement on its website Friday. Only one of 32 economists in a Bloomberg survey forecast a decrease, predicting a move to 9.75 percent. The rest saw no change. The ruble weakened beyond 70 against the dollar after the announcement.
“This was an unexpected decision since inflation remains high and the ruble continues to weaken,” Vladimir Bragin, head of research at Alfa Capital in Moscow, said by phone.
“The central bank is under pressure from the government, which is facing a slowing economy and needs measures that would stimulate investments and enhance conditions for the banking system.”
Governor Elvira Nabiullina has faced calls for policy easing from officials and business leaders, including billionaire Oleg Deripaska, who’ve warned that economic activity will grind to a halt after last month’s rate increase from 10.5 percent, the biggest since 1998.
The central bank, which last cut its main lending rate in December 2011, raised the benchmark six times last year to tame inflation kindled by U.S. and European sanctions over Ukraine and Russia’s countermeasures.
“Cutting the rate by two percentage points will provide an opportunity to jumpstart lending to the real economy,” Nabiullina said in an e-mailed statement after the decision. “The key rate is still quite high at 15 percent and contributes to reaching medium-term inflation goals but doesn’t excessively cool the economy.”
The economy may shrink 3.2 percent in the first half after growing an estimated 0.6 percent in 2014, the central bank said in its statement. Gross domestic product may shrink 4 percent in 2015 and grow 0.5 percent in 2016, according to economists polled by Bloomberg.
Highlighting policy makers’ challenges, Russian President Vladimir Putin’s economic aide Andrey Belousov said Jan. 15 that doing business was “impossible” at the current level of interest rates.
Belousov’s comments came a day after the Bank of Russia put Dmitry Tulin in charge of monetary policy, the biggest leadership shakeup since Nabiullina took charge in June 2013. The move followed criticism by Putin, who said policy makers should have reacted quicker to the crisis.
The emergency rate increase last month has “resulted in stabilization of inflation and depreciation expectations to the extent the Bank of Russia expected,” policy makers said.
The decision is “due to the shift in the balance of risks of accelerated consumer price growth and a cooling economy,” the central bank said in the statement. “Further inflation pressure will be contained by a decrease in economic activity.”
Inflation soared to 13.1 percent as of Jan. 26, according to the central bank. That’s the fastest pace since April 2009.
Consumer-price growth reached 11.4 percent in December and may accelerate to between 15 percent and 17 percent in March or April, according to Deputy Economy Minister Alexey Vedev. In the past decade, inflation peaked at 15.1 percent in 2008 and previously surpassed that level in 2002.
“The central bank’s actions are becoming less and less predictable, which isn’t positive for the currency market,” Oleg Popov, a money manager at April Capital in Moscow, said by e-mail. “The ruble will continue weakening against the dollar and will try to find an equilibrium level at higher levels.”
The ruble has fallen 14 percent in January, weighed by oil’s slide to the lowest since 2009 and the escalating conflict in Ukraine. European Union foreign ministers gave the go-ahead on Thursday to prepare steps that would move beyond last year’s decisions to ban financing for Russian state-owned banks and prohibit the export of advanced energy-exploration technology.
The Russian currency traded 2.4 percent weaker at 70.3910 against the dollar as of 2:39 p.m. in Moscow.
The “decision will bring more negatives than positives,” Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow, said by phone. “The rate cut is counterproductive because it goes counter to market expectations. So it’s only increasing pressure on the ruble and will provoke further acceleration of price growth.”
The regulator shifted to a free-floating exchange rate ahead of schedule in November and burned through about $88 billion of reserves last year to prop up the ruble.
Russia is now left with “more limited” monetary-policy flexibility, Standard & Poor’s said Jan. 26, when it cut the country’s sovereign credit rating below investment grade for the first time in a decade.
“The central bank is still taking care of the banking system,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, the only economist in the Bloomberg survey to predict a rate cut. “They know price stability will only come if you have financial stability. That is why they lowered the rate in order to give banks some more breathing space.”
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