The Central Bank cut interest rates for the ninth time since April on Tuesday in a bid to slow down the appreciation of the ruble and support the economy’s still-fragile recovery from recession.
The cut brought the benchmark refinancing rate to a new historic low of 9 percent, effective from Wednesday, from 9.5 now, taking cumulative easing to date to 400 basis points. Analysts said there was still room for it to be cut further.
Other rates were also cut by 50 basis points, bringing the minimum rate on one-day repo auctions, a key Central Bank liquidity tool, to 6.25 percent.
Official interest rate moves have gained greater importance in the country as the global credit crunch increased banks’ reliance on Central Bank funding, but domestic markets remain more driven by oil prices than by changes in monetary policy.
“Lending activity of Russian banks is still at a low level, and internal demand remains insufficient to ensure stable growth of manufacturing, which led to the need to cut rates,” the Central Bank said in a statement. “The decision [to cut rates] was taken with the aim of further increasing the accessibility of credit resources … and stimulating end demand.”
It added that favorable trends in inflation have facilitated the rate cut. Prime Minister Vladimir Putin last weekend forecast that full-year inflation would come in at 9.6 percent, down from 13.3 percent in 2008.
The country is starting to recover from its first recession in a decade, into which it slipped in the second half of 2008 at a time of falling oil and commodity prices, investor flight from emerging markets and the global credit crunch.
The recovery remains fragile, however, underscored by data on Tuesday showing that the pace of month-on-month economic growth eased in October thanks to a lackluster performance in the manufacturing sector.
As such, some are growing worried that the recent rally in the ruble, fanned by oil prices and the still comparatively high levels of interest rates, could unseat the recovery and jeopardize efforts to boost domestic industry.
The Central Bank said the reduction in domestic and external rate differentials as a result of the rate cut “will contribute to restraining the appreciation of the ruble.”
Yields on OFZ Treasury bonds maturing in January 2010, one of the most liquid on the market, remained around nine-month lows, at 8.18 percent.
The ruble traded at 35.24 versus a dollar-euro basket, little changed after the rate decision. It has retreated from last week’s nine-month peak of 35.03 set a week ago, but remains up 9 percent since the start of September.
“It is clear that the Central Bank is looking ever more intensely at the appreciation of the ruble,” said Alexander Morozov, chief economist on Russia and the CIS at HSBC. “If the rate cuts do not lead to a significant reduction in short-term capital inflows into Russian assets, we can expect additional measures … which they have already hinted at.”
The Central Bank has said that possible “soft” measures to limit inflow of speculative capital are being discussed, and could include changes in reserve requirements, caps on banks’ open foreign currency positions and less favorable tax rules on interest on external borrowing.
Officials remain against the reintroduction of capital controls, however, which were scrapped in 2006.
The Central Bank has regularly intervened to slow down the ruble’s appreciation, allowing its floating trading corridor to shift by 5 kopeks for each $700 million of interventions.
But it has refrained from stopping the rally altogether, as allowing increased exchange rate volatility brings the country a step closer to its goal of moving to a free float by 2012.
The rate cut was widely expected after the Central Bank’s first deputy chairman, Alexei Ulyukayev, said this month that there was scope for more easing this year, adding that the issue will be debated at the Nov. 24 board meeting.
“It was expected, timely. … It should have a positive impact on loans,” said Nikolai Kashcheyev, an economist at Sberbank.
“The Central Bank will look around, think what to do next. For now, nothing is stopping it [from moving again], but perhaps not by 50 basis points. Perhaps it will cut by another 25.”
Future rate moves will be determined by inflation trends, the level of activity in industry and bank lending as well as the state of domestic financial markets, the Central Bank said.
Officials have said monetary easing could well continue into the first half of 2010, and analysts polled by Reuters at the end of October saw the refinancing rate easing to 8.75 percent by the end of next June.