Russia unexpectedly backed away from its efforts to prop up the ruble, cutting interest rates just weeks after taking them to an 11-year high and signaling policy makers are now focused on mitigating an economic slump that threatens to destabilize the financial system.
The central bank lowered its benchmark rate to 15 percent from 17 percent, spurring a wave of ruble selling that drove it down as much as 4 percent against the dollar to levels not seen since panic swept across Moscow’s financial markets last month. The interest-rate cut surprised all but one of the 32 economists surveyed by Bloomberg.
Central bank Governor Elvira Nabiullina has come under pressure from officials and business leaders, including billionaire Oleg Deripaska, who’ve warned that the economy will grind to a halt and undermine banks unless rates come down. The central bank had raised the benchmark rate six times last year, including a 6.5-point increase in December that was the biggest since 1998, to defend the ruble and tame inflation stoked by international sanctions related to the Ukraine conflict.
“The lobby of bankers and industrialists is growing, with clear, almost aggressive, pressure on the central bank to cut,” David Nangle, the head of research at Moscow-based Renaissance Capital, said by e-mail. Russian banks have been “the losers” from the surge in interest rates, he said.
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 contract 4 percent in 2015 and grow 0.5 percent in 2016, according to economists polled by Bloomberg.
“Cutting the rate by two percentage points will provide an opportunity to jumpstart lending to the real economy,” Nabiullina said in an e-mailed statement after the decision.
Loan growth fell to an almost four-year low last year as a 42 percent surge in provisioning against bad debt sent bank profits tumbling. Andrey Kostin, chief executive officer of VTB Group, warned this month that Russia’s second-biggest bank will suffer “significant” losses if policy makers don’t lower borrowing costs to 10 percent.
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.
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 today.
Today’s decision is “due to the shift in the balance of risks of accelerated consumer price growth and a cooling economy,” they 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. The rate may rise to as high as 17 percent by 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.
“The central bank’s actions are becoming less and less predictable, which isn’t positive for the currency market,” Oleg Popov, a money manager at April Capital in Moscow, said by e-mail. “The ruble will continue weakening against the dollar and will try to find an equilibrium level at higher levels.”
The currency has fallen 14 percent in January, weighed by oil’s slide to the lowest since 2009 and the escalating conflict in Ukraine. European Union foreign ministers gave the go-ahead on Thursday to prepare steps that would move beyond last year’s decisions to ban financing for Russian state-owned banks and prohibit the export of advanced energy-exploration technology.
The ruble traded 2.6 percent weaker at 70.5675 against the dollar as of 7:14 p.m. in Moscow. It’s down 50 percent over the past year.
Today’s “decision will bring more negatives than positives,” Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow, said by phone. “It goes counter to market expectations. So it’s only increasing pressure on the ruble and will provoke further acceleration of price growth.”
Policy makers shifted to a free-floating exchange rate ahead of schedule in November and burned through about $88 billion of reserves last year to prop up the ruble.
Russia is now left with “more limited” monetary-policy flexibility, Standard & Poor’s said Jan. 26, when it cut the country’s sovereign credit rating below investment grade for the first time in a decade.
“The central bank is still taking care of the banking system,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, the only forecaster in the Bloomberg survey to predict a rate cut. “They know price stability will only come if you have financial stability. That is why they lowered the rate in order to give banks some more breathing space.”