Rouble slides past 70 per dollar after Russia's surprise rate cut

[LONDON] The rouble weakened beyond 70 against the dollar for the first time since panic swept across Russian financial markets last month after the central bank unexpectedly lowered its key interest rate to 15 per cent.

The currency slid 2.6 per cent to 70.5575 a dollar by 1:51 pm in Moscow after the Bank of Russia reduced its one-week auction rate from 17 per cent. Only one of 32 economists in a Bloomberg survey forecast a cut, with the rest expecting no change.

The last time the currency weakened past 70 was on December 17, a day after it tumbled past 80 in a rout that spread across emerging markets. The rouble has fallen 14 per cent in January, weighed by oil's slide and worsening violence 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 central bank might have weighted in the risk of a further selloff in the rouble versus the repercussions of the drastic rate hike in December for the domestic banking system and decided to cut rates," Bernd Berg, a London-based emerging- market strategist at Societe Generale SA, said by e-mail. "Official reasoning for this rate cut is a stabilisation of CPI inflation." Inflation accelerated to a 5 1/2-year high of 11.4 per cent in December, while analysts project the economy of the world's largest energy exporter will shrink 4 per cent this year.

Policy makers raised the key rate by 6.5 percentage points to 17 per cent in an emergency decision on December 16 in Moscow. The move initially failed to stem a run on the currency until Russian authorities announced a series of measures to calm investors.

"It looks to me like the wrong timing in easing monetary policy, as geopolitics remains a negative driver," Luis Costa, the chief strategist for eastern Europe, the Middle East and Africa at Citigroup Inc. in London, said by e-mail.

BLOOMBERG