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Russia cuts key rate to 14% as inflation eases after ruble panic

Friday, March 13, 2015 - 18:58

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Russia's central bank lowered its key interest rate in line with most economist forecasts, as stabilizing inflation clears the path to boosting an economy buckling under low oil prices and sanctions over Ukraine.

[MOSCOW] Russia's central bank lowered its key interest rate in line with most economist forecasts, as stabilizing inflation clears the path to boosting an economy buckling under low oil prices and sanctions over Ukraine.

The one-week auction rate was cut by one percentage point to 14 per cent, the central bank said in a statement on its website Friday. Seventeen of 32 economists in a Bloomberg survey predicted the move, with nine seeing no change and five forecasting a bigger reduction. Another analyst predicted a half-point cut. Policy makers will hold a news conference later in the day.

The Bank of Russia is slowing the pace of decreases after a surprise 2 percentage-point cut at its previous meeting in January as oil prices slipped and inflation in February soared to the fastest since 2002. Even with price growth more than fourfold its mid-term target, the regulator is answering calls from business to unwind December's emergency increase to 17 per cent to buoy an economy entering its first recession in six years.

"Inflation is still there and the central bank is going to compromise between economic growth and inflation," Konstantin Artemov, a money manager at Raiffeisen Capital Asset Management in Moscow, said before the decision. "Everybody understands it's a hard time for the economy and rates should be lower." Inflation has more than doubled from the start of last year following a 46 per cent drop in the ruble in 2014. The Russian currency traded little changed at 61.13 against the dollar after the rate announcement.

Ruble, Sanctions The ruble's collapse and Russia's bans on food imports in retaliation for US and European sanctions over the conflict in Ukraine helped stoke inflation in February to 16.7 per cent from a year earlier, compared with 15 per cent in January. Even so, it's started slowing on a weekly basis. Price increases in the weeks ended March 2 and March 10 fell to four-month lows of 0.2 per cent.

Higher inflation readings are the result of past factors and the Bank of Russia estimates price growth will decelerate amid economic contraction and shrinking consumer demand, Governor Elvira Nabiullina said in an interview with Bloomberg Television Feb 9. Price growth may peak at 17 per cent to 17.5 per cent, according to the Economy Ministry.

"There is no reason for the central bank to focus on current inflation, which will continue to accelerate for some time," said Dmitry Polevoy, the chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow, who correctly predicted a rate cut to to 14 per cent. "Its policy is traditionally based on inflation expectations." Reviving Economy Pushing ahead with the rate-cut cycle will enable policy makers to focus more on jumpstarting the economy and pulling loan growth from four-year lows. Some banks in Russia have been blocked from global debt markets by sanctions that are hobbling consumer spending and choking investments.

Gross domestic product contracted 1.5 per cent in January from a year earlier, according to a preliminary estimate by the Economy Ministry. GDP may shrink 3 per cent this year after 0.6 per cent growth in 2014, according to the government's official forecast.

"While inflation is yet to peak, the unexpected 200 basis- point cut in January indicated that the central bank is determined to ease the burden on the economy as soon as possible to reduce the risk of severe recession," said Piotr Matys, a London-based foreign-exchange strategist at Rabobank International who correctly predicted the 100 basis-point rate cut.

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