Sept. 14 (Bloomberg) -- Russia’s central bank lowered its main interest rates by a quarter percentage point after the world’s biggest energy exporter suffered a record economic contraction and as the nation faces a slow recovery.

Bank Rossii cut the refinancing rate to 10.5 percent from 10.75 percent and lowered the repurchase rate charged on central bank loans to 9.5 percent from 9.75 percent, effective from tomorrow. The bank has cut the rates six times since April 24. It last lowered them by a quarter point on Aug. 10.

The “sum total of macroeconomic trends” allowed the bank to “maintain the tempo of lowering interest rates,” it said in a statement. “Further steps on lowering interest rates will depend on inflationary trends, the dynamics of output and lending activity, and the state of market interest rates.”

Russian output shrank a record 10.9 percent last quarter after a decline in global trade undermined demand for the commodity-reliant nation’s exports of raw materials from steel to oil. Policy makers are trying balance a faltering economy with annual inflation in excess of 10 percent while trying to offer ruble returns that keep the currency attractive.

The ruble weakened 0.7 percent to 30.8697 per dollar at 3:16 p.m. in Moscow and declined 0.5 percent against the target currency basket to 37.1850.

Balancing Act

Russia’s benchmark refinancing rate is the second-highest in Europe, after Serbia’s and Iceland’s 12 percent.

“The central bank was cautious as it expects the fall in consumer demand to bottom out in October and November, increasing inflationary risks,” said Elina Ribakova, chief economist for Citigroup Inc. in Moscow. “But the authorities have a bias toward growth and will likely continue easing monetary policy even in the face of faster inflation.”

As central banks in Europe and the U.S. shift focus to decide on the timing of rate increases to match an economic recovery, Russia still needs lower rates to help push the economy out of recession. Stimulus measures will need to last another six months, Kudrin said while attending the G20 in London on Sept. 4.

The bank will cut rates even as inflation hovers above 10 percent. Consumer prices rose an annual 11.6 percent in August, the Federal Statistics Office said on Sept. 2.

‘Significantly Less’

“I see no reason for any significant acceleration of inflation in the remaining months of the year,” central bank Chairman Sergey Ignatiev said on June 24. The inflation rate for the year would be “significantly less” than the government’s latest forecast of 11.6 percent to 12 percent, he said.

Bank Rossii will lower the refinance rate by a quarter point in October and again in November “for a cumulative 3 percentage points in cuts since April, returning the symbolic refinance rate to the all-time low of 10 percent that it last reached in June, 2007,” Rory MacFarquhar, a Moscow-based economist at Goldman Sachs Inc. said in a Sept. 9 report.

The central bank managed a 35 percent depreciation of the ruble in the second half of last year before settling for a wider trading band of 26 to 41 against a basket of dollars and euros since January. The bank wants the ruble to be a free floating currency by 2011, enabling it to adopt an inflation target.

The latest spate of rate cuts and the prospect of further reductions in borrowing costs may yet encourage banks to ease credit flows as lower rates mean households and businesses are better able to service their debt.

‘Vicious Cycle’

Lower rates have so far failed to revive credit flows and Prime Minister Vladimir Putin is urging bankers on the receiving end of government bailout funds to ramp up lending to resuscitate the domestic economy.

The “vicious cycle” that stifled corporate and household lending has started to ease, Ignatiev told President Dmitry Medvedev on Sept. 9. Loans to companies rose 0.8 percent in August, he said.

“August saw positive changes in the lending activity of the banking sector,” the central bank said today. “However, the level of interest rates for most end borrowers continues to restrain economic growth.”

Banks shrank their corporate loan books by 0.2 percent in July, the smallest decrease in three months, while lending to consumers dropped 0.4 percent for the sixth consecutive monthly decline, the central bank said on Sept. 1. Russian overdue bank loans reached 5.5 percent of total lending in July compared with 5 percent a month earlier.

Raised Spending

The government has raised spending to battle the slump, swelling the budget deficit in the first eight months to 5.9 percent of gross domestic product, Finance Minister Alexei Kudrin said on Sept. 3.

Stimulus measures and resurgent trade demand in parts of Europe and Asia may help Russia’s economy move toward recovery in the third quarter. Manufacturing contracted last month at the slowest pace in 11 months as new business and output grew simultaneously for the first time since September, VTB Capital said on Sept. 1.

“We can say more boldly that we are at the bottom of the crisis and there will be growth in the future,” Kudrin said in an interview with state television channel Vesti-24, broadcast on Sept. 7. “The third quarter will be the period in which Russia comes out of recession,” he said, adding that growth won’t be “stable.”

Though the economy may be through the worst, any recovery will fail to restore growth rates to those enjoyed between 2003 and 2007, when expansion averaged close to 7 percent, economists say.

The government failed to take advantage of a decade-long boom to diversify the economy during Putin’s tenure as president between 2000 and 2008, according to Natalia Orlova, chief economist at Alfa Bank, Russia’s biggest privately-owned lender.

Before April, the central bank raised rates to discourage investors from borrowing rubles to bet against the currency as collapsing global demand saw the price of oil tumble more than a $100 per barrel between July last year and December.

To contact the reporters on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net;

Last Updated: September 14, 2009 07:18 EDT