The Central Bank cut key rates by 25 basis points Friday, knocking the ruble off monthlong highs, and analysts forecast more easing to come as the economy remains sluggish and the currency is still strong.
The widely expected cut, the 12th in a year, takes the benchmark refinancing rate to a fresh historic low of 8.25 percent effective from Monday, March 29. That takes the cumulative easing since April 2009 to 475 basis points.
"Despite certain positive changes in the dynamics of macroeconomic indicators pointing to a resumption of economic activity, this process remains not sufficiently stable," the Central Bank said in a statement.
"By limiting the stimulus for short term capital inflows [the rate cuts] should help balance the domestic currency market," it added, but noted that ruble volatility could increase in the future.
After the announcement, the ruble edged away from an earlier peak of 33.92 against the dollar-euro basket — its strongest since late 2008 — to trade at 34.06.
"This is not a turnaround [in the ruble rally], it is a short-term reaction to the Central Bank's decision," said a dealer at a major foreign bank in Moscow.
Analysts had expected that any rate cut could prompt a knee-jerk sell-off of the ruble. But in the longer term, the currency still looks attractive to yield-hungry investors as oil prices hover near $80 a barrel and Russia's rates remain far higher than in most Western economies.
"The trend for ruble appreciation will remain," said Alexander Morozov at HSBC. "Carry trade will likely continue, especially taking into account the strong balance of payments."
Tim Ash, an analyst at RBS, said the move was "as expected given the strength of the ruble, concern over the durability of the real economy recovery and the downside pressure on inflation."
The fragility of Russia's recovery from its first recession in a decade was underscored last week by data showing that the economy actually contracted in February month on month as a result of falling investment and weak domestic demand.
While the rate cuts are filtering through to lower charges on loans, overall lending remains on a downward trend as banks fret about credit worthiness and companies are reluctant to launch new projects until demand recovers.
The Central Bank said the "advisability" of future rate moves will depend on inflation, manufacturing sector and lending dynamics and the state of the domestic financial market. The next rate decision is due in April, it said, giving no date.
The inclusion of the word "advisability" this month could be a hint that the monetary easing cycle is approaching its end. But most analysts still expect at least one more move, noting that with inflation running at 6.9 percent year on year, there is still room for easing without compromising the Central Bank's aim of keeping real rates positive.
Annika Lindband, an analyst at Nordea, forecast a 25 basis point move in the second quarter "as the ruble continues to strengthen and year-on-year inflation moderates especially on favorable base effects."