The Central Bank cut interest rates Monday for the 14th time in a yearlong easing cycle and signaled a pause, saying policy should now be at a level where loans are affordable and inflation is contained.
A Reuters poll last week gave even chances of a rate cut or of unchanged policy in May, making this month's decision the most finely balanced one in the current cycle. The benchmark refinancing rate will be reduced by 25 basis points to a new historic low of 7.75 percent effective from Tuesday, taking the cumulative easing since April 2009 to 525 basis points.
"The parameters set … create the conditions for the formation of money market rates that will enable an acceptable balance between the affordability of borrowing funds and inflation risks," the Central Bank said in a statement.
"Consequently, the Bank of Russia thinks it likely that the achieved level of interest rates will be maintained in the coming months."
April economic data pointed to signs of a sturdier recovery from recession, while banks' lending activity has finally picked up, and ruble appreciation — seen as another reason for past Central Bank rate cuts — ran out of steam.
All were seen as reasons for rates being on hold this month, while still-benign inflation levels supported the argument that there was still room left for a bit more monetary easing.
Deputy Economic Development Minister Andrei Klepach on Monday forecast May inflation at 0.2 percent to 0.3 percent on the month.
"It looks like the Central Bank focused to a greater extent on … inflation, which is quite favorable," said Yaroslav Lissovolik, chief strategist at Deutsche Bank in Moscow.
"The fact that there is such instability on financial markets may have eased the Central Bank's decision, which stimulates the economy even more and compensates for the negative impact of global markets."
The stock market and the ruble have come under pressure along with oil prices in recent weeks.
The Central Bank said it was not concerned by the level of ruble volatility and that the new level of rates should not create significant reasons for capital inflows.
"A weaker ruble is more of a boon for the Russian economy," which will enable the Central Bank to take a breather, said Nikolai Podguzov, fixed income analyst at Renaissance Capital.
"The Central Bank gave a pretty clear signal that at least for two to three months, for the summer period, they are taking a pause in cuts," he said, adding that hikes this year were unlikely, while another cut is possible if inflation remains tame.
The statement came after the close of ruble trade on the MICEX. News of the cut could add pressure on the ruble, but markets will likely take heart from the chances that policy will now remain on hold for a while at levels that still leave yields attractive compared with many developed and emerging economies.
For the first time in recent months, the rate move was not uniform, with overnight deposit rates — a key barometer for interbank rates — left on hold at 2.5 percent.
The Central Bank also issued a separate statement revising the fixed Lombard rates set for June 1 operations, which had earlier been announced at unchanged levels.