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Russia Economy Sinks, Key Rate Cut
World Economy

Russia Economy Sinks, Key Rate Cut

Russia’s central bank unexpectedly cut its benchmark interest rate by two percentage points, letting the ruble slide as the economy sinks toward recession.
The one-week auction rate was cut to 15 percent from 17 percent, the central bank said in a statement on its website Friday.
Only one of 32 economists in a Bloomberg survey forecast a decrease, predicting a move to 9.75 percent. The rest saw no change.
The ruble weakened beyond 70 against the dollar after the announcement.
“This was an unexpected decision since inflation remains high and the ruble continues to weaken,” Vladimir Bragin, head of research at Alfa Capital in Moscow, said by phone. “The central bank is under pressure from the government, which is facing a slowing economy and needs measures that would stimulate investments and enhance conditions for the banking system.”

  Credit Revival
“Cutting the rate by two percentage points will provide an opportunity to jumpstart lending to the real economy,” Governor Elvira Nabiullina said in an e-mailed statement.
“The key rate is still quite high at 15 percent and contributes to reaching medium-term inflation goals but doesn’t excessively cool the economy.”
The economy may shrink 3.2 percent in the first half after growing an estimated 0.6 percent in 2014, the central bank said in its statement. Gross domestic product may shrink 4 percent in 2015 and grow 0.5 percent in 2016, according to economists polled by Bloomberg.
Highlighting policy makers’ challenges, Russian President Vladimir Putin’s economic aide Andrey Belousov said Jan. 15 that doing business was “impossible” at the current level of interest rates.
Belousov’s comments came a day after the Bank of Russia put Dmitry Tulin in charge of monetary policy, the biggest leadership shakeup since Nabiullina took charge in June 2013. The move followed criticism by Putin, who said policy makers should have reacted quicker to the crisis.

  Inflation, Economy
The emergency rate increase last month has “resulted in stabilization of inflation and depreciation expectations to the extent the Bank of Russia expected,” policy makers said Friday.
Today’s decision is “due to the shift in the balance of risks of accelerated consumer price growth and a cooling economy,” the central bank said in the statement. “Further inflation pressure will be contained by a decrease in economic activity.”
Inflation soared to 13.1 percent as of Jan. 26, according to the central bank. That’s the fastest pace since April 2009.
Consumer-price growth reached 11.4 percent in December and may accelerate to between 15 percent and 17 percent in March or April, according to Deputy Economy Minister Alexey Vedev.
In the past decade, inflation peaked at 15.1 percent in 2008 and previously surpassed that level in 2002.

 

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