Russia’s central bank on Thursday cut its key interest rate by 1.5 percentage points to 12.5 percent, in a bid to lift the economy out of recession.
The economy had contracted by 2.2 percent in the first three months, hit by a collapse in crude prices and Western sanctions over the Ukraine conflict.
Thursday’s rate cut is the third this year following an emergency hike by a massive 6.5 percentage points in December to a prohibitive 17 percent as the bank sought then to stop a sharp depreciation of the Russian currency.
But the central bank says that inflation risks have now receded, and that there are now “persistent risks of considerable economy cooling”.
It added that it “will be ready to continue cutting the key rate” as it expects consumer prices to continue easing.
The ruble was trading at around 51.8 to the dollar on Thursday afternoon several hours after the announcement, after opening at 51.4.
– ‘Optimistic’ inflation hopes –
The central bank said current inflation stands at 16.5 percent but attributed it to “short-term factors” which include last year’s ruble crash, when the currency traded at as high as 80 to the dollar.
It said that “annual inflation will slow down to less than 8 percent in a year and to the target of 4 percent in 2017.”
Chief emerging markets economist for Capital Economics Neil Shearing called the figures “a little optimistic” adding that the ruble’s recovery “has been built on rather shaky foundations” of stabilising crude prices.
He added that Thursday’s cut is bigger than expected and likely means that the rate will fall to nine percent by the end of 2016.
“This is a clear signal for banks to lower their rates,” said Dmitry Lepetikov, an expert with VTB24 bank, citing the need by the real economy to be able to borrow on more affordable terms.
Russia’s economy has been hit by a series of shocks, including economic sanctions imposed by Western countries over Ukraine, to which Moscow has responded with an agricultural embargo that sent food prices soaring.
At the same, crude prices have more than halved in a year, sending the Russian economy — which is heavily dependent on its energy exports — into a nosedive.
The Kremlin has however denied there is a crisis.
Speaking earlier this week, President Vladimir Putin said “it’s already clear that there isn’t any collapse” in the economy, calling it “certain phenomena, certain difficulties” rather than a crisis.
Analysts at Natixis Economic Research however cautioned that “the structural constraints of Russian economy should limit the improvement for the years to come” even with easing pressure on prices.
The government has called for a rate reduction for weeks, with Deputy Prime Minister Arkady Dvorkovich announcing on Wednesday that the government “very much hopes for further decrease of the key rate” which would lower costs of borrowing and make rates “normal”.
Underlining the political pressure the central bunk is facing, it even invited Russia’s economy and finance ministers to the Thursday meeting, saying it would “help the ministers to better understand our arguments in taking decisions.”