Russian central bank cuts key interest rate

Russia's central bank cut Friday its key interest rate by half a percentage point to 10 percent, but warned it couldn't provide another quick jolt to jump-start stalled economic growth.

The Bank of Russia said in a statement that the cut, the first since June and widely expected by analysts, was possible thanks to a "decrease in inflation expectations and unstable economic activity".

However the central bank made clear it intends now to hold off on another cut until early next year at the earliest.

Russia's energy-reliant economy is currently mired in the longest recession of President Vladimir Putin's 16-year rule on the back of low oil prices and Western sanctions over Moscow's meddling in Ukraine.

Cutting interest rates provides a boost to growth as it makes it cheaper for companies and consumers to borrow funds to invest and buy goods.

While inflation dropped to 6.6 percent in September from 7.2 percent in July, the central bank said that to secure "...a steady decline in inflation the current key rate needs to be maintained till end-2016 with a possibility to cut it in 2017 Q1-Q2". 

Although Friday's cut had been expected, the central bank's "surprisingly hawkish" tone is "at least in part aimed at dampening expectations" on the market regarding further cuts, said Liza Ermolenko, emerging markets economist at Capital Economics.

Central bank chief Elvira Nabiullina confirmed in a press conference that it wanted to send an emphatic message that its priority is lowering the inflation rate to four percent by the end of 2017.

"We see that the market's expectations... are somewhat different from ours," she said.

"We see inflationary risks that demand a more restrained lowering" of the rate, she said.

Another key interest rate cut this year is an "extremely unlikely scenario," she said, and will only happen if the Russian economy performs considerably better than forecast.

The bank will hold two more meetings before the end of the year.

- Taming inflation before elections -

Some economists have suggested that the focus on inflation control is driven by political needs ahead of the 2018 presidential election.

"Reaching the 4 percent target by the end of 2017 will help calm public concerns about a key economic issue on the eve of the vote," Jason Bush, senior analyst at Eurasia Group, said in a statement Thursday.

Rampant inflation and the erosion of purchasing power is an important issue for Russians, who are also going to the polls this weekend for parliamentary elections.

Inflation and a 50-percent plunge in the value of the ruble since 2014, which has pushed up the prices of imported goods, has hit Russians hard in their wallets.

Nabiullina said there is no risk of the ruble crashing as it did in late 2014, even through the bank has stopped propping up the currency. 

"The ruble now fluctuates much less than oil prices," she said. "We don't intervene, the ruble really is floating and is still rather stable."

In terms of overall economic performance, the central bank predicted a possible return later this year to quarter-on-quarter expansion, which is what economists look at to determine whether an economy is growing.

The economy is still expected to shrink by around a total of 1 percent this year, after contracting by 3.7 percent in 2015.

In 2017 the bank said it believed it would grow overall by less than 1 percent.

In a sign that prospects are slowly improving the S&P Global rating agency announced Friday that it had revised its outlook for Russia from negative to stable.

"The stable outlook reflects our expectation that the Russian economy and policy making will continue to adjust to the relatively low oil price environment while keeping its external and fiscal metrics in check," the agency said.  

SourcE: AFP