Tags: russia | economy | rates | central bank

Russia Cuts Rates More Than Forecast to Boost Economy

Thursday, 30 April 2015 01:40 PM

Russia’s central bank cut its key interest rate more than forecast to offer relief to the recession-bound economy and said it’s ready to ease policy further if inflation risks continue to abate.

The one-week auction rate was lowered to 12.5 percent from 14 percent, the central bank said in a statement on its website Thursday. Ten of 40 economists surveyed by Bloomberg predicted the move. Twenty-five analysts forecast a decrease of 100 basis points and five saw a 200 basis-point cut.

The Bank of Russia is accelerating its pace of easing with a third reduction this year as it unwinds December’s emergency increase to 17 percent. Governor Elvira Nabiullina is shifting focus to an economy entering its first recession in six years after a cease-fire in Ukraine and a rebound in oil prices set the ruble on course for the world’s biggest currency rally.

“The Russian central bank looks to be consistent in its monetary policy after the U-turn in January 2015 when it took into account economic prospects,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail. “But the real effect of current easing will be seen in the economy in 2016 at the earliest.”

The Russian currency’s biggest monthly rally since 1993 is paving the way for faster easing after the regulator followed a surprise two-point reduction in January by lowering the benchmark by a percentage point in March. The ruble has strengthened 18 percent against the dollar this year after losing almost half its value in 2014.

Ruble, Inflation

“Amid ruble appreciation and a significant contraction in consumer demand in February-April 2015, monthly consumer price growth is declining and annual inflation is tending to stabilize,” the central bank said in the statement. “As inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate.”

The ruble trimmed losses after the announcement and traded 0.4 percent weaker at 51.2610 against the dollar as of 1:52 p.m. in Moscow.

The ruble’s strength is contributing to a slowdown in inflation, and “with other things being equal and no new significant negative factors,” that will allow for a reduction in the key rate, Nabiullina said April 16 in Washington.

Derivatives traders also see borrowing costs falling, with forward-rate agreements signaling 185 basis points of decreases in the next three months, the most since the end of March.

Faster Slowdown

Inflation, which polls indicate is one of the main concerns for Russians, accelerated to 16.9 percent from a year earlier in March. Price growth eased to 16.5 percent as of April 27 and will reach 8 percent next April, the central bank said in the statement Thursday, adding that inflation will slow “faster than expected.”

The ruble’s collapse last year and Russia’s ban on food imports in retaliation for sanctions over the conflict in Ukraine helped to more than double inflation from the start of last year. The central bank’s medium-term inflation target is 4 percent for 2017.

“The fact that the Bank of Russia opted for a larger cut than 100 basis points last time not only reflects further signs that inflationary pressures are fading, but perhaps more importantly growing concerns among Russian officials about the rapid pace of ruble appreciation so far this year,” Piotr Matys, a London-based foreign-exchange strategist at Rabobank, said by e-mail. While helping curtail inflation, a strong ruble “could also undermine prospects for exports — the only source of growth for the economy.”

Economy Slumps

Gross domestic product contracted 2.2 percent from a year earlier in the first quarter, the Economy Ministry said in a report Wednesday. GDP may expand 2.3 percent in 2016 after a contraction of 2.8 percent this year, Economy Minister Alexei Ulyukayev said April 23. The ministry previously saw a 3 percent contraction in 2015.

“Credit supply is slowing, and so is the economy,” Wolf- Fabian Hungerland, an economist at Berenberg Bank in Hamburg, said by e-mail before the decision. “The central bank finds itself in an environment where a cut of 100 or 200 basis points doesn’t make a difference to investors anymore, but it still does for the economy and the financial system.”

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Russia's central bank cut its key interest rate more than forecast to offer relief to the recession-bound economy and said it's ready to ease policy further if inflation risks continue to abate.
russia, economy, rates, central bank
Thursday, 30 April 2015 01:40 PM
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