Russia bank cuts main interest rate amid fears of recession

Russia bank cuts main interest rate amid fears of recession
Updated 31 January 2015
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Russia bank cuts main interest rate amid fears of recession

Russia bank cuts main interest rate amid fears of recession

MOSCOW: Russia’s central bank unexpectedly cut its main interest rate on Friday as fears of recession mount in the country following the fall in global oil prices and Western sanctions over the Ukraine crisis.
The central bank reduced its one-week minimum auction repo rate by two points to 15 percent, a little over a month after pushing it up by 6.5 points to 17 percent after a run on the ruble.
The bank had been widely expected not to change the rate. Following the decision, the rouble extended losses to trade as much as 4 percent lower on the day against the dollar, though it later clawed back some of the losses.
The move implies a shift in the bank’s priorities away from clamping down on rising inflation and supporting the ruble, toward trying to support economic activity, which the bank expects to fall sharply in the coming months.
“Today’s decision to lower key interest rate by 2 percentage points is intended to balance the goal of curbing inflation and restore economic growth,” the bank’s governor, Elvira Nabiullina, said after the announcement.
In an e-mailed statement, the banks’s press service quoted her as saying the rate remained high enough to allow the Bank of Russia to reach its inflation target in the medium term.
The decision will also fuel speculation that recent changes in the bank’s senior management have shifted the bank toward more dovish monetary policy, possibly under pressure from the Kremlin, banks and business lobbies.
“The decision appears to be politically driven, since it is a cut that shows the central bank is worried about the risks to the banking sector. It looks like the central bank’s hand has been forced,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.
Earlier this month the bank’s head of monetary policy, Ksenia Yudayeva, an anti-inflation hawk, was replaced by Dmitry Tulin, a central bank veteran seen as more acceptable to bankers, who have been called for lower interest rates.
But the shift in policy may also reflect the realization that Russia’s economy is heading for a hard landing as low oil prices look set to persist and the conflict in Ukraine has worsened, defying hopes of an early end to Western sanctions.
Macroeconomic data released earlier this week showed real wages slumping by 4.7 percent year-on-year in December and real disposable income slumping by 7.3 percent, boding ill for economic growth in the months ahead.
In an accompanying statement, the bank said it expected gross domestic product to fall by 3.2 percent in annual terms during the first half of 2015, following growth of 0.6 percent in 2014.

INFLATION RISING
Analysts had nevertheless expected the bank to hold rates this month, as the bank had previously said it would cut rates when inflation is on a sustained downward trend. Inflation has instead been shooting up as a result of the slide in the ruble.
The bank said that it saw conditions for lower inflation in the medium term, but effectively acknowledged that inflation would stay in double-digits throughout this year.
It said it expected inflation to fall below 10 percent in January 2016. Inflation was 13.2 percent as of Jan. 26, the bank said, up from 11.4 percent in December.
“I see big risks in today’s decision,” said Rosbank economist Evgeny Koshelev.
“Now the geopolitical background is unclear and inflation pressure remains quite strong, as well as signals for the outflow of capital... This (rate cut) is probably a reason to sell the ruble more in the short term.”
However, Renaissance Capital economist Oleg Kouzmin said he welcomed the move: “It’s good that they are lowering now. This is a sensible step. This will help the economy and allow stability to be preserved.”
He added that high interest rates do not especially help the ruble as capital outflows are largely linked to debt repayments.
“Will the capital outflow be stronger? Yes, but there will be a weaker ruble and a stronger current account, which means it won’t be necessary to spend more forex reserves.”