Bank of Russia cuts interest rate first time since July

Business Friday 10/June/2016 16:43 PM
By: Times News Service
Bank of Russia cuts interest rate first time since July

Moscow: Russia’s central bank reduced borrowing costs for the first time in almost a year as its focus shifts away from risks to inflation after the ruble rallied and oil prices stabilised.
The one-week auction rate was cut to 10.5 per cent from 11 per cent, according to a statement on Friday. Twenty-two of 43 economists in a Bloomberg survey predicted a 50 basis-point decrease, with the rest seeing no change. "The Bank of Russia will consider the possibility of a further rate cut based on estimates for inflation risks and the extent to which a decline in inflation aligns with the forecast trajectory,” the central bank said in the statement.
In one of the most debated decisions since Governor Elvira Nabiullina took charge three years ago, the central bank is resuming an easing cycle thwarted since last July by the crash in oil and a new round of inflation pressure. The pivot comes before a parliamentary ballot in September, Vladimir Putin’s biggest electoral test since he returned to the presidency in 2012, which is raising the threat of spending increases that could again fan prices.
‘Everything improved’
"Almost everything improved since the last meeting in April,” Dmitry Shagardin, an analyst at Bank Saint-Petersburg, said before the announcement. "Inflation failed to accelerate despite expectations, oil is stable at a high level in the past two months.”
Inflation risks including wage growth and uncertainty about fiscal policy mean the pace of easing should be "gradual,” the International Monetary Fund (IMF) said last month. In contrast, the head of VTB Group, Russia’s second-largest lender, has called for a "decisive” single cut of two percentage points to give the market a "clear signal.”
The ruble extended losses after the announcement and traded 0.6 per cent weaker at 64.6925 against the dollar as of 1:34pm in Moscow. The Russian currency has gained almost 14 per cent against the dollar this year, the second-biggest rally in emerging markets, after a 20 per cent loss in 2015. Oil prices advanced 37 per cent in the same period.
While the central bank shifted to an easing bias in April for the first time this year, it made any rate cuts conditional on inflation risks falling enough to have "greater certainty” of reaching the 4 per cent price target in 2017. Policy makers have also conceded that monetary easing will bring little relief to the economy that’s been in contraction since the start of last year.
Inflation surprise
The Bank of Russia has warned about a possible increase in inflation in May-June. Even so, annual price growth remained at 7.3 per cent for a third month in May, the slowest since 2014. That’s less than half the level of inflation in July 2015, when the central bank last cut rates.
A recovery in oil may deepen the slowdown in inflation. The consumer-price index may end 2016 at 5.5 per cent from a year earlier if oil prices remain at their current level, according to Deputy Finance Minister Maxim Oreshkin.
"There are reasons to cut,” Olga Sterina, an analyst at UralSib Capital in Moscow, said before the decision. "The key rate, at its level of 11 per cent, was high when taking into account current inflation.”