The Central Bank on Thursday unveiled its eighth interest rate cut since April, as lower inflation enabled it to press on with the easing campaign aimed at setting the recession-struck economy firmly on the path to recovery.
The Central Bank reduced all key rates by 50 basis points effective from Oct. 30, taking the benchmark refinancing rate down to a historic low of 9.5 percent.
The move comes a day after data showed October would likely be the third month of zero inflation, putting investors on alert for another rate cut.
“The decision was made … first of all with the aim of additional stimulation for lending activity of the banking sector,” the Central Bank said.
The latest move takes the cumulative reduction in the refinancing rate to 350 basis points since April 2009.
“Even though we didn’t know the timing, it was expected that the Central Bank would continue to ease its monetary stance,” said Lars Rasmussen, an analyst at Danske Bank. “We see room for further easing in the coming months to 9 percent by year-end and 8.50 percent in the first quarter.”
The Central Bank said future rate cuts would depend on inflation, lending activity and the situation in currency and debt markets.
The economy grew in the third quarter, marking the end of its first recession in a decade, but officials have stressed the recovery is far from sure-footed.
“To give the necessary sustainability to the rising trend [in output], credit support is needed for the real economy sector,” the Central Bank said.
Bigger companies such as oil major LUKoil have taken advantage of the improved global climate to seek funds abroad. But the Central Bank is keen to discourage large-scale foreign borrowing, seen as a trigger behind the depth of the crisis in late 2008-early 2009.
An eight-week oil-fueled rally has taken the ruble to its highest levels since December versus the dollar, although this week has seen a bit of a correction with investors locking in profits.
“The reduction in the difference in the levels of short-term interest rates in the domestic and external markets due to the lowering of the rates for Central Bank operations will lead to the reduction of the attractiveness of short-term investments into Russian assets and hinder the accumulation of risks in the currency and stock markets,” the Central Bank said.
For now though, Russian rates are still much higher than rates of 1 percent or less in the rest of the Group of Eight, making the ruble a popular carry trade among investors searching for high-yielding emerging market assets.
“We see the increasing likelihood of interest rate cuts as a marginally negative development for the ruble, which could add pressure on the unit,” Vladimir Osakovsky, an analyst at UniCredit Bank, said in a research note.
“However, we expect a limited market impact as local rates remain relatively high from a regional perspective, and the unit is clearly more influenced by commodities price developments.”
The ruble firmed slightly on the day to 29.21 versus the dollar and 35.50 against the euro-dollar basket, taking its cues from a slight rebound in oil and better-than-expected U.S. data. The MICEX index also took its cues from abroad, adding 1.8 percent and moving back toward recent 13-month highs.
An auction of the Central Bank’s OBR bonds attracted over 8 billion rubles of bids as investors rushed to lock into a higher yield before the rate cut takes effect.