Russia’s central bank slashed the cost of borrowing yesterday in an attempt to inject energy into an economy that has been pummelled by low oil prices and sanctions imposed by the West.
In a signal that it was prepared to risk stoking a short-term rise in inflation, the Central Bank of the Russian Federation sliced a full percentage point off its key interest rate, which now stands at 14 per cent.
It was the second time this year that it has cut interest rates and comes after the decision to lower borrowing costs by two percentage points in January.
While expected, the cut was lower than had been predicted by many economists, although the bank said yesterday that it was prepared to reduce the rate again if the need arose.
As well as battling to reinvigorate GDP, which by its own estimates will drop by as much as 4 per cent this year, Russia’s central bank has been trying to counter the plunging value of its currency, the rouble, which plagued the country late last year.
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Russia lifted interest rates by 6.5 percentage points to a high of 17 per cent in December, prompting the bank to spend more than $80 billion in the foreign exchange markets buying up roubles to defend the value of its currency. The rouble gained slightly against the dollar after yesterday’s decision, edging up to 61.37 roubles, although it was still trading about 0.5 per cent lower on the day.
Vladimir Osakovskiy, chief Russia economist at Bank of America Merrill Lynch in Moscow, said: “We think that the market was pricing a bit more aggressive cut, as the rouble has actually strengthened a little bit on the news, even despite considerably lower oil prices. They have sent a lot of signals that more rate cuts might be coming in the future, so they will have more opportunities to deliver more.”
As it pushed through yesterday’s rate cut, the central bank said that what had appeared to be the beginning of a recovery just before Christmas was in fact a false dawn.
Russia’s economy has been savaged by a near-50 per cent drop in the value of oil since June, as well as an array of trade sanctions imposed by western countries because of its aggressive intervention in Ukraine.
Inflation also has been soaring, increasing to 16.8 per cent last month, although the central bank is confident that, after peaking during the next two months, it will fall back to 9 per cent during the course of this year.