June 4 (Bloomberg) -- Russia’s central bank cut its main interest rates for the third time in six weeks as inflation slows and the government tries to stimulate bank lending to counter the first economic contraction in a decade.

Bank Rossii lowered the refinancing rate, seen as the limit for borrowing, to 11.5 percent from 12 percent and reduced the repurchase rate charged on central bank loans to 10.5 percent from 11 percent. The cuts are effective as of tomorrow. The bank cut its rates for the first time since 2007 on April 24, followed by a further reduction on May 13.

Russia’s central bank said in April it will start a “trend toward further cuts” as inflation eased and the country’s recession deepened in the first quarter. The economy may shrink as much as 8 percent this year, Economy Minister Elvira Nabiullina said in an interview last month.

Gross domestic product contracted 9.5 percent in the first quarter, the worst drop in 15 years, as manufacturing slumped and the global recession eroded demand for Russia’s oil, gas and metals.

The central bank’s cuts in April and May were the first since two increases in the refinancing rate and four in the repo rate since November. The cost of money was increased to arrest the ruble’s 30 percent drop since August and to prevent lenders using borrowed cash to speculate on the currency’s decline as the global slowdown eroded demand for Russia’s exports of oil, gas and metals.

Inflation Target

The slower pace of consumer-price growth will allow the central bank to lower the refinancing rate, which will reduce interest charged by commercial lenders, Bank Rossii Chairman Sergey Ignatiev said at a banking conference on May 28.

Inflation may slow below the government’s target, 13 percent, for the first time this year, First Deputy Chairman Alexei Ulyukayev said in an interview last month.

The inflation in the year through June 1 fell to 6.8 percent from 7.7 percent a year earlier, according to the Moscow-based Federal Statistics Service. Consumer prices fell more than economists expected in April, to 13.2 percent.

“The ongoing easing of monetary policy is appropriate in light of the inflation outlook,” the International Monetary Fund Russia mission said in a statement on June 1, following meetings with government officials in Moscow.

The Washington-based lender cut its forecast for Russia’s economic growth in 2009 to 6.5 percent from 6 percent.

To contact the reporter on this story: Paul Abelsky in St. Petersburg at pabelsky@bloomberg.net.

Last Updated: June 4, 2009 03:27 EDT