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Russia cuts key rate for first time in 10 months

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Russia's central bank cut its key interest rate by half a percentage point on Friday, the first reduction in 10 months after the ruble recovered thanks to a bounce in oil and fading inflation fears.

[MOSCOW] Russia's central bank cut its key interest rate by half a percentage point on Friday, the first reduction in 10 months after the ruble recovered thanks to a bounce in oil and fading inflation fears.

"The Bank of Russia Board of Directors decided to reduce the key rate from 11.00 to 10.50 per cent," the bank said in a statement.

"The Board of Directors notes the positive trends of more stable inflation, decreased inflation expectations and inflation risks against the backdrop of imminent growth recovery in the economy." Russia is desperate to breathe life into its energy-driven economy, which is mired in a recession caused mainly by the drop in oil prices and Western sanctions imposed over Moscow's meddling in Ukraine.

The ruble has risen some 25 per cent since January as the price of oil has nearly doubled after hitting its lowest point in over a decade.

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Inflation has now also steadied at around 7.3 per cent, according to the central bank, its lowest level since 2014.

The bank said that it was now marking down its inflation forecast for the end of 2016 to between five and six percent and said inflation would hit its long-term target of four percent by the end of 2017.

The rise in the national currency and stabilisation of inflation had ramped up pressure on the bank to cut its rate for the first time since late July 2015.

A slump in oil prices from their 2014 peaks and worries over inflation spelt the end of a series of rate reductions back then as Moscow cut back following a monster rate rise in December 2014 aimed at stemming a dramatic ruble drop.

In its statement announcing Friday's reduction the bank pledged that it would also look to further cut back the key lending rate in future.

"The Bank of Russia will consider the possibility of a further rate cut based on estimates for inflation risks and alignment of inflation decline with the forecast trajectory," the statement said.

The ruble weakened slightly against the dollar to around 64.5 and to around 72.9 against the euro as of 1130 GMT.

The International Monetary Fund predicted that Russia's economy will contract by some 1.5 per cent this year before growing by 1 per cent in 2017.

Russia is gearing up for parliamentary elections in September that will test how resilient support for the authorities is in the face of growing economic woes.

AFP

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