Russia Lowers Key Rate to 14% as Inflation Eases Amid Slump

Russia’s central bank lowered its main interest rate and signaled more policy easing ahead if inflation continues to ease as the economy buckles under low oil prices and sanctions over Ukraine.

The one-week auction rate was cut by one percentage point to 14 percent, the central bank said in a statement on its website Friday. Seventeen of 32 economists in a Bloomberg survey predicted the move, with nine seeing no change and five forecasting a bigger reduction. Another analyst predicted a half-point cut.

The Bank of Russia is pressing ahead with monetary easing after a surprise 2 percentage-point cut at its January meeting as weekly inflation decelerated. Even with price growth more than fourfold its mid-term target, the regulator is responding to calls from business to unwind December’s emergency increase to 17 percent to buoy an economy entering its first recession in six years.

“If no new pro-inflationary factors emerge and inflation will slow in line with our outlook, we’ll continue to decrease the key rate,” Governor Elvira Nabiullina told reporters in Moscow after the decision. “The rate of decline in inflation will depend on which course of events will unfold and how the situation in the economy will evolve. An attempt to reduce inflation at any cost would clearly be a short-sighted strategy.”

More Easing

Derivatives traders see borrowing costs falling. The three-month MosPrime rate, which large Moscow banks say they charge one another for ruble deposits, may drop 140 basis points in the next three months, forward-rate agreements compiled by Bloomberg show.

The ruble’s collapse and Russia’s ban on food imports in retaliation for U.S. and European sanctions over the conflict in Ukraine helped stoke inflation in February to 16.7 percent from a year earlier, compared with 15 percent in January. Even so, it’s started slowing on a weekly basis. Price increases in the weeks ended March 2 and March 10 fell to four-month lows of 0.2 percent.

The Bank of Russia predicts inflation will end the year at 12 percent to 14 percent, with economic growth continuing to deteriorate until the first quarter of next year, according to Nabiullina.

Inflation has more than doubled from the start of last year following a 46 percent drop in the ruble in 2014. The Russian currency swung between gains and losses after the decision and traded little changed at 61.15 against the dollar as of 5:20 p.m. in Moscow.

Unwinding Increases

“The central bank is clearly determined to unwind the aggressive monetary policy tightening implemented last year when the ruble was in a freefall,” Piotr Matys, a London-based foreign-exchange strategist at Rabobank International, said by e-mail. As long as the ruble is “fairly stable,” the central bank will continue to lower rates by 100-200 basis points every meeting “to ease the burden on the economy and reduce the risk of a severe and potentially prolonged recession.”

The Bank of Russia predicts its medium-term inflation target of 4 percent will be reached in 2017. Price growth, which was at 16.7 percent from a year earlier on March 10, is set to peak in the second quarter, the central bank said in the statement.

“The current monetary policy and low economic activity will be conducive to the slowing of annual consumer price growth,” it said.

Reviving Growth

Pushing ahead with the rate-cut cycle will enable policy makers to focus more on jumpstarting the economy and pulling loan growth from four-year lows. Some banks in Russia have been blocked from global debt markets by sanctions that are hobbling consumer spending and choking investments.

The rate decrease is important and will improve access to credit for different parts of the economy, Prime Minister Dmitry Medvedev said at a meeting outside Moscow. Speaking on a conference call Friday, Herbert Moos, deputy chief executive officer at VTB Group, said the cut, while welcome, is “insufficient” to revive lending.

Gross domestic product contracted 1.5 percent in January from a year earlier, according to a preliminary estimate by the Economy Ministry. GDP may shrink as much as 4 percent this year, the central bank said Friday.

“It is a neutral to slightly ruble-friendly decision but it will have almost no major impact on the economy,” Dmitri Barinov, a money manager at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail. “Every cut is positive for banks. It’s a smaller cut probably because inflation surprised on the upside lately and the central bank prefers ruble stability.”

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