Russia's central bank unexpectedly cut its main interest rate on Friday as fears of recession mount in the country following the fall in global oil prices and Western sanctions over the Ukraine crisis. The bank reduced its one-week minimum auction repo rate by two points to 15 percent, a little over a month after pushing it up by 6.5 points to 17 percent after a run on the rouble. The bank had been widely expected not to change the rate. Following the decision, the rouble extended losses to trade as much as 4 percent down on the day against the dollar, though it later clawed back some of the losses. The move implies a shift in the Bank of Russia's priorities away from clamping down on rising inflation and supporting the rouble, towards trying to support economic activity, which the bank expects to fall sharply in the coming months. The decision will also fuel speculation that recent changes in the bank's senior management have shifted the bank towards more dovish monetary policy, possibly under pressure from the Kremlin, banks and business lobbies. "Today's decision to lower key interest rate by 2 percentage points is intended to balance the goal of curbing inflation and restore economic growth," the bank's governor, Elvira Nabiullina, said in an emailed statement after the announcement. She said the rate remained high enough to allow the bank to reach its inflation target in the medium term. President Vladimir Putin, who won popularity by providing Russians with more financial stability after the chaos of the 1990s following the fall of the Soviet Union, did not comment and the Kremlin denies influencing central bank decisions. But Finance Minister Anton Siluanov said he backed the rate cut, and that the central bank had good reason to say the situation on the currency market was under control. "The decision appears to be politically driven, since it is a cut that shows the central bank is worried about the risks to the banking sector. It looks like the central bank's hand has been forced," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. Earlier this month the bank's head of monetary policy, Ksenia Yudayeva, an anti-inflation hawk, was replaced by Dmitry Tulin, a central bank veteran seen as more acceptable to bankers, who have called for lower interest rates. FEARS OF RECESSION the shift in policy may also reflect the realisation that Russia's economy is heading for a hard landing as low oil prices look set to persist and the conflict in Ukraine has worsened, defying hopes of an early end to Western sanctions. Data released this week showed real wages slumping by 4.7 percent year-on-year in December and real disposable income slumping by 7.3 percent, boding ill for economic growth in the months ahead. The bank said it expected gross domestic product to fall by 3.2 percent in annual terms during the first half of 2015, following growth of 0.6 percent in 2014. "This tells us they are looking beyond rising inflation in the coming months to try to stimulate economic growth," said William Jackson, emerging markets economist at Capital Economics in London. "But I don't think the rate cut will have much impact (on growth). If you look at the stress on the banking sector, capital flight, the real income squeeze and collapse in oil prices, then a recession is inevitable." Analysts had nevertheless expected the bank to hold rates this month, as the bank had previously said it would cut rates when inflation is on a sustained downward trend. Inflation has instead been shooting up as a result of the slide in the rouble. The bank said that it saw conditions for lower inflation in the medium term, but effectively acknowledged that inflation would stay in double digits throughout this year. It said it expected inflation to fall below 10 percent in January 2016. Inflation was 13.2 percent as of Jan. 26, the bank said, up from 11.4 percent in December. "I see big risks in today's decision," said Rosbank economist Evgeny Koshelev. "Now the geopolitical background is unclear and inflation pressure remains quite strong, as well as signals for the outflow of capital... This (rate cut) is probably a reason to sell the rouble more in the short term." However, Renaissance Capital economist Oleg Kouzmin said he welcomed the move: "It's good that they are lowering now. This is a sensible step. This will help the economy and allow stability to be preserved." He added that high interest rates do not especially help the rouble as capital outflows are largely linked to debt repayments. "Will the capital outflow be stronger? Yes, but there will be a weaker rouble and a stronger current account, which means it won't be necessary to spend more forex reserves." Source: Reuters
